Date: October 23, 2018
U.S. Futures Tumble on Peak Profit, Trade Concerns: Markets Wrap
U.S. futures extended losses, with contracts on the Dow Jones Industrial Average off more than 400 points, after results from Caterpillar and 3M added to concern that corporate profits have peaked. The yen, gold and Treasuries all rose on demand for haven assets. The sell-off in U.S. equities put the S&P 500 Index on track for its 12th loss in 14 days as investors grow concerned that the trade war and rising interest rates have put an end to runaway expansion of corporate profits. Caterpillar sank 6 percent in early trading after flagging concern over rising materials costs, while 3M dropped 5 percent after cutting its forecast. The Stoxx Europe 600 Index slid toward the lowest level since December 2016 as Asian equities teetered on the verge of a bear market. Some of the steepest losses were in Japan, Hong Kong and China, where shares had posted the biggest jump in more than two years a day earlier. Disappointing earnings from Renault and some European tech companies added to the pain in Europe. Gold headed for its highest close in three months and benchmark Treasury yields dropped to 3.16 percent. Investor nerves are on full display in the flight to quality beginning to take shape after global equities tried and failed to stem this month’s declines. U.S. growth data later in the week as well as earnings from companies including Amazon, Alphabet, Microsoft and Intel could be key to how far much further the drop will go. In the meantime, uncertainty over the death of a Saudi journalist, Italy’s budget and Brexit are among the factors weighing on sentiment.
U.K. Manufacturer Outlook Slumps as Labor Fears Hit 40-Year High
The outlook for U.K. manufacturing is the weakest in three years amid growing concerns of skilled labor shortages before the nation’s exit from the European Union. Companies expect output to remain unchanged in the three months to January, the worst forecast since 2015, the Confederation of British Industry said in a report Tuesday. Business optimism is falling at the fastest pace since 2016’s Brexit referendum, while expectations for skills and labor shortages are at the highest level in more than four decades, the lobby group said. The survey provides more evidence that businesses are becoming increasingly cautious as they await clarity on future trade conditions. The CBI said that manufacturers are cutting back on investment, with capital expenditure on plant and machinery set to be reduced at the fastest pace since July 2009. Brexit is complicating an already difficult situation for U.K. manufacturers. Globally, sentiment is also deteriorating, in part due to higher Federal Reserve interest rates and an ongoing trade war between the U.S. and China.
China’s $195 Billion Debt Splurge Has Less Bang Than You Might Think
China’s burst of local bond issuance is supposed to fund roads, affordable homes and other infrastructure developments that will help support its flagging economy. But there don’t seem to be enough projects around to spend the money on. Provincial authorities had by the end of September already raised 92 percent of the 1.35 trillion yuan ($195 billion) worth of special infrastructure bonds that the central government has targeted for the entire year. The bonds, which are separate to provincial authorities’ budgets, are part of an attempt to counter the economic slowdown by financing projects from railwys to environmental facilities and affordable homes. But analysis of bond data by Bloomberg News shows that about 42 percent of the total special bonds sold since August are earmarked for “land reserves,” which means compensating farmers for property acquisition or preparing the acreage for future development. In short, the economic boost of the debt creation will be less immediate than if it was used to build highways or redevelop sub-standard housing straight away. “Land reserve bonds are favored because local officials don’t have enough projects in the pipeline when they’re being asked to speed up spending,” said Nie Wen, a Shanghai-based economist at Huabao Trust Co. “The direct impact on investment is limited,” he said. “If other funding channels for local governments remain tightly controlled, special bonds alone won’t be enough to restore growth.” The sudden surge in such debt sold into the market has also had an indirect crowding-out impact — yields on other forms of government bonds have risen, in turn pushing up those on corporate debt. As China seeks to buffer the domestic economy and shield it from the trade war with the U.S., the difficulties around the bond program heighten the chances the nation will just increase indebtedness without stoking growth