Date: October 12, 2018
Stocks Gain With Earnings in Focus; Dollar Steady: Markets Wrap
Stocks staged a broad recovery on Friday as earnings reports from some of America’s biggest banks gave investors something to cheer about at the end of a tumultuous week. The dollar and Treasuries were steady. U.S. equity-index futures jumped the most in four months, suggesting the S&P 500 may snap its six-day losing streak when American markets open. JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. kicked off the third-quarter reporting season with mostly positive results. The Stoxx Europe 600 index gained for the first time in three days, with miners leading the advance and most sectors in the green, though the gauge is still headed for its worst week since February. Strong trade data from China also buoyed markets, with the MSCI Asia Pacific Index rising from the lowest level since May 2017 as shares in Hong Kong and South Korea led the way. Emerging-market stocks headed for the biggest gain in more than two years as risk appetite improved, and most developing-nation currencies advanced against the dollar. The yuan retreated following a Bloomberg report that U.S. Treasury staff concluded China isn’t manipulating its exchange rate. China trade data showed exports rebounded, while imports remained robust, thanks to strong demand at home and abroad despite worsening relations with the U.S. That eased some concern about the impact of the trade war, which had contributed to the worst equity sell-off since February amid worries about the Federal Reserve’s policy path. As traders debate whether the correction has created buying opportunities, the third-quarter reports from U.S. companies will tell whether tax breaks are still supporting corporate earnings. “We expect further volatility and possible additional down moves,” though “the bear checklist is not yet flashing red,” Pascal Blanque, chief investment office at Amundi SA, said in a client note. “The focus will be on the U.S. earnings season, so any news will be carefully assessed by the market.”
Italian Lawmakers Approve Deficit Goal as EU Showdown Nears
The Italian parliament voted in favor of the populist government’s fiscal outline including a higher deficit target for 2019 which has unsettled markets and been sharply criticized by the European Union. The two houses passed motions backing the government’s update to the so-called Economic and Financial Document, setting a 2019 deficit goal of 2.4 percent of gross domestic product which EU officials have signaled will put Italy in breach of the bloc’s rules. The government is also targeting a deficit of 2.1 percent of GDP in 2020 and 1.8 percent in 2021, and a reduction in the debt ratio in the 2019-2021 period. Speaking to a joint budget committee earlier this week, Finance Minister Giovanni Tria said that the extra deficit will help fund planned measures including a new income-support tool, a lower retirement age and corporate tax cuts. EU economy chief Pierre Moscovici and fellow EU commissioner Valdis Dombrovskis have told the Italian government that their wider-than-expected budget targets point to a “significant deviation” from the bloc’s agreed-upon fiscal path. Deputy Premiers Matteo Salvini of the League and Luigi Di Maio of the Five Star Movement have defied the EU, saying they won’t back down from their expensive plans. A draft budget is due in Brussels for inspection by Monday. The yield spread between Italy and Germany’s 10-year bonds narrowed to 298 basis points of 8:41 a.m. in Rome, or down 7 basis points from a five-year high reached on Thursday. The European Central Bank won’t come to Italy’s rescue if either the government or the banking system run out of cash, unless the country secures a bailout from the EU, Reuters reported, citing five senior sources familiar with the ECB’s thinking. The Italian cabinet will likely meet on Monday to discuss the budget law, Ansa newswire reported. The government will then submit the budget law to the parliament for discussion. Final parliamentary approval has to be given by the end of this year. Finance Minister Tria showed the “determination of the Italian government to ensure the steady reduction of the public debt to GDP ratio” during talks with U.S. Treasury Secretary Steven Mnuchin on the sidelines of a summit of G-20 finance chiefs in Bali, Indonesia, the minister’s office said in a statement. Tria also expressed “the intention to maintain a constructive dialog with the EU Commission and the other Euro area partners.”
IMF Says Yuan Is Fairly Valued Ahead of U.S. Currency Manipulation Report
The yuan is “broadly in line” with China’s economic fundamentals, a senior IMF official said, days before the U.S. Treasury Department is scheduled to release a closely watched report on currency manipulation. China’s currency has fallen more than 6 percent this year against the dollar, prompting speculation it may fall through the key level of 7 per dollar. The decline has attracted the notice of the U.S., which is locked in a tit-for-tat tariff dispute with Beijing. In an interview Thursday, Treasury Secretary Steven Mnuchin said the U.S. wants to make sure the depreciation isn’t a “competitive devaluation.” The IMF says the drop in the yuan reflects the People’s Bank of China’s commitment to make the exchange rate more flexible. “According to our framework, the exchange rate of the renminbi is not out of line. It is broadly in line with the fundamentals,” Markus Rodlauer, deputy director of the fund’s Asia and Pacific Department, said in an interview Friday at the IMF annual meetings in Bali, Indonesia, using the official name for the currency. The IMF’s view is a key benchmark as trade tensions between the U.S. and China leak into the currency realm. Treasury Department staff don’t believe there’s ground to label China a currency manipulator in the department’s semi-annual foreign-exchange report, two people familiar with the matter told Bloomberg News. It’s possible Mnuchin could revise the final report before it’s released. If the U.S. did name China a manipulator, Mnuchin would have to either enter direct talks with Beijing or conduct negotiations through the IMF. Mnuchin, speaking in an interview with CNBC TV from Bali on Friday, said currency issues are an element of the trade talks with China. Mnuchin said he expressed concerns about “the weakness in the currency” to PBOC Governor Yi Gang this week at the IMF meetings. Rodlauer declined to comment on the future value of the yuan. But he said the PBOC is allowing the exchange rate to respond to “market pressures,” without allowing big “destabilizing” movements.