June 4, 2018
Stocks Extend Gain on Growth Outlook; Dollar Drops: Markets Wrap
U.S. equity futures and European stocks advanced on Monday, tracking peers in Asia as optimism over the world’s largest economy helped investors put protectionist fears to one side. Treasuries were steady, the dollar fell, and the pound and euro rose. The Stoxx Europe 600 Index climbed as almost every industry group traded in the green, with utility companies leading the way. S&P 500 contracts pointed to the U.S. benchmark extending Friday’s advance, while the MSCI Asia Pacific Index surged even as China warned it will withdraw from commitments it made on trade if President Donald Trump carries out a separate threat to impose tariffs on the Asian country. The dollar pulled back after completing a seventh week of gains. The 10-year Treasury yields held at about 2.9 percent. Investors are in a broad risk-on mood after impressive U.S. jobs data on Friday, which provided an upbeat end to a week that was otherwise dominated by the threat of another euro-area crisis. Much of that concern seems to have dissipated after nationalist parties finally took power in Italy, ending months of deadlock, while the Socialist led-opposition in Spain ousted Prime Minister Mariano Rajoy with a no-confidence vote Friday. Attention may yet turn back to trade, however. G-7 leaders meet in Quebec later this week, with the European Union and Canada threatening retaliatory measures unless Trump reverses course on new steel and aluminum levies. “There is a lot of to-ing and fro-ing which so far hasn’t led to the imposition of some of these threatened tariffs, but I think the tit-for-tat and the possibility that this will start to gain unwanted momentum is very important to the markets,” John Wraith, head of U.K. macro rates strategy at UBS Group AG, told Bloomberg Television. “That said, it’s somewhat of a slow burner, it takes time to have an impact and issues like the situation on the Korean Peninsula and recently the Italian political situation, they have more immediate impact.” Elsewhere, emerging-market stocks jumped and their currencies rose. West Texas Intermediate crude declined amid speculation OPEC may phase out supply cuts at a time when American shale continues to surge.
U.K. Manufacturing Growth Picks Up in ‘Unconvincing’ Rebound
U.K. manufacturing growth unexpectedly quickened in May as firms worked through backlogs and built up their inventories. IHS Markit’s Purchasing Managers Index for the industry rose to 54.4 in May, up from 53.9 in April and beating economists’ estimates for a drop. Still, Markit noted the rebound “masked several areas of potential concern,” with companies seeing the largest rise in unsold stock in the survey’s history and the expansion of new work slowing. “Scratch beneath the surface and the rebound in the PMI from April’s 17-month low is far from convincing,” said Rob Dobson, Director at IHS Markit. “There will need to be a rapid improvement in demand if output volumes are to be sustained in the coming months.” The survey also showed that cost inflation intensified, while supply chains came under pressure and the pace of job creation lost momentum. The gauge of input costs eased to a four-month low, while rising intakes of new work tested capacity, leading to a modest increase in outstanding business and prompting companies to raise employment. Markit’s concerns highlight the risk that the U.K. economy may not see a significant rebound from the first quarter, where heavy snow and storms helped reduce growth to near zero. That increases the possibility that the nation’s underlying strength has diminished, complicating the case for Bank of England policy makers who say that more interest-rate hikes are needed to contain above-target inflation. Investors, who are currently pricing in a one-in-three chance of a BOE increase in August, will get more information on the health of the economy next week, when Markit publishes similar indexes for the U.K.’s construction and dominant services sector.
Investor Confidence in Euro Economy Knocked by Italy Turmoil
Investors are worried that political upheaval in Italy will derail euro-area economic growth. Concerns over the new populist government’s euro-skeptic tendencies and budget-busting spending plans prompted a slide in sentiment among financial-market participants, according to a survey by Sentix. Expectations for the euro-area economy dropped to the lowest since August 2012, when the region was embroiled in a debt crisis that threatened to break up the bloc. “The new government in Italy is giving investors fears for the euro zone,” Sentix said. While U.S. tariffs on steel and aluminum are “also having a negative impact” it added that those concerns “seem to be even lower than those before the government in Rome reopened the euro crisis. Either way, investors expect a serious slowdown in growth.” Italian government bonds slid and yields surged last week amid alarm over a constitutional crisis after President Sergio Mattarella rejected a finance minister critical of the euro. While markets calmed somewhat after the parties tweaked their proposal to form a government, investors are worried that plans to challenge European Union fiscal rules could lead to a showdown further down the road. The conflict comes at a crucial time for the euro area, with economic growth apparently slowing. Weaker economic activity combined with declining confidence will complicate the task of the European Central Bank, which is scheduled to meet next week to discuss when it might be able to halt its bond-buying program. Momentum worldwide has been cooling in recent months. A global Purchasing Managers’ Index on Friday indicated the second quarter of 2018 will see weaker growth than the first. The Sentix survey showed that expectations for Germany, the euro zone’s largest economy, also slid to the lowest since August 2012. While record-low unemployment is supporting the nation’s domestic consumption, exports are under pressure. “Germany seems particularly vulnerable to an expansion of trade disputes with the U.S.,” Sentix said. “The German economy, which seemed invulnerable at the beginning of the year, is now facing a relatively rough headwind.”
Japan’s Fiscal Discipline Wavers as Aging Pressure Mounts
Japan looks set to surrender one of its most effective tools for curbing social spending as aging pushes up health, pension and eldercare costs. Key advisers to the finance ministry recently dropped a recommendation to cap annual increases in social spending at 500 billion yen ($4.6 billion), suggesting instead that limits be calibrated with aging costs, without offering details. They also favored a five-year delay in the government’s target for achieving a surplus in the primary balance, a move that won support from advisers to Prime Minister Shinzo Abe this week. With the government’s mid-term economic policy plan to be released later this month, here’s a look at key metrics in Japan’s battle to get its finances in order. They show economic growth has boosted tax receipts and narrowed the deficit, but that government debt is still piling up. While social spending is the main driver of Japan’s swelling budgets, and public outlays have increased every year since Abe came to power in late 2012, the 500 billion yen cap has been a success. Social spending in the current fiscal year that started April 1 is projected to rise by the same amount as the cap, to 32.97 trillion yen. Economists including Mizuho Research Institute’s Akihiko Noda are concerned that removal of the cap could see spending accelerate at a time when Japan should be adopting a stricter limits. Getting a surplus in the primary balance, which measures the government’s fiscal position excluding interest payments on its borrowings, has been a key target in tackling Japan’s debt problem. Pushing back the ambitious goal from 2020 to 2025 is another sign that Japan is a long way from getting on top of the debt problem.