Date: September 5, 2018
U.S. Stocks Fall, Dollar Gains as EM Assets Wobble: Markets Wrap
U.S. stocks fell, Treasuries weakened and the dollar climbed as trade tensions persisted and emerging markets remained under pressure. The S&P 500 started September on the back foot as Nike Inc.’s politically controversial ad campaign and Facebook Inc.’s analyst downgrade weighed on major averages. With the exception of Ford Motor Co., all major automakers reported sales that trailed analysts’ estimates. Amazon.com surged past $1 trillion in market value boosting consumer shares. Metals tumbled as the dollar advanced, roiling mining stocks. The greenback added to gains after a reading of U.S. factory output surged. Emerging-market currencies headed for the lowest close this year, with South Africa’s rand leading losses. Declines in Treasuries, gold and the yen left investors with few havens. Oil climbed as a storm threatened U.S. production on the Gulf Coast. U.S. investors returned from a three-day weekend to ongoing woes in emerging-market assets and simmering trade tensions between America and Canada as the Trump administration moves toward more tariffs against Chinese goods. The factory data gave a reprieve but equities resumed declines in afternoon trading .Nike’s new ads contributed to the charged political atmosphere, while Facebook’s woes persisted. South Africa’s unexpected tumble into a recession and Argentina’s urgent financial measures increased concern about more volatility in stocks and currencies. Investors have increasingly been weighing whether the troubles will spill into developed markets, which advanced during the summer despite trade salvos and a Federal Reserve that’s heading toward a late-September rate hike.
Euro-Area Businesses Show Warning Signs Amid Solid Growth
Euro-area businesses are starting to feel the heat from recently intensified trade tensions even as economic growth remains solid for now. IHS Markit’s Purchasing Manager’s Index for manufacturing and services rose to 54.5 in August from 54.3 in July, marginally exceeding a prior flash estimate. The increase masks concern over business prospects, with expectations dropping to their lowest in 23 months. Data so far signal third-quarter economic growth may match the 0.4 percent rate recorded in the previous three months, but the “downturn in optimism raises questions over whether this pace of growth can be sustained into the fourth quarter,” said Chris Williamson, an economist at IHS Markit. As the European Central Bank is moving toward ending unprecedented bond buying, frictions between the U.S. and its trade partners over tariffs have raised concerns that economic growth could slow markedly and cloud the inflation outlook. President Mario Draghi has noted that global uncertainties are “prominent,” while also reiterating that he’s confident price pressures are gradually building in the 19-nation bloc. Input costs rose sharply in August, according to Wednesday’s report. Factory-gate inflation was “most acute” in Germany, while price trends remained “relatively subdued” in Italy. Economic fortunes in the euro area are diverging as well, IHS Markit said. Germany and France saw momentum accelerating to six and two-month highs, respectively. A gauge for Italy fell to its lowest level in nearly two years and a measure for Spain signaled the weakest expansion in almost five years for the third quarter. In the U.K., the dominant services sector expanded faster than expected in August, according to a separate report, pointing to a “robust” pace of growth for the nation’s economy.
Bank Indonesia Chief Signals Rate Hike as Rupiah Rout Worsens
Indonesia’s central bank governor vowed Wednesday to take “pre-emptive” steps to counter a deepening rout in the currency, using language he’d adopted before to signal an interest-rate hike. “We will keep monitoring what happens globally,” Bank Indonesia Governor Perry Warjiyo told lawmakers in Jakarta. “We will still take pre-emptive, front-loaded and ahead of the curve measures to face new developments.” After raising interest rates four times since May by a total of 1.25 percentage points, Warjiyo and his deputies have softened some of their rhetoric on interest rates in recent weeks, saying policy action will be “data-dependent.” The governor’s comments on Wednesday reflect a return to stronger language, suggesting another rate hike may be coming, possibly before the next scheduled policy decision on Sept. 27. “Turkey and Argentina issues have forced us to formulate further scenarios and steps to stabilize the rupiah,” Warjiyo said. Policy makers will take measures, including rate hikes and dual intervention, he said. The central bank last had an out-of-cycle meeting on May 30, when it raised rates by 25 basis points. The rupiah has slumped this week as a market selloff in Argentina, Turkey and now South Africa spreads across emerging markets. The currency is heading toward 15,000 to the dollar for the first time since the Asian financial crisis two decades ago and is down more than 9 percent this year. The benchmark Jakarta Composite Index slumped 3.8 percent on Wednesday, the most since November 2016. Aside from rate hikes and market intervention, Indonesia’s government is also intensifying efforts to rein in the current account deficit and protect the rupiah. Charu Chanana, an economist at Continuum Economics in Singapore, said that while the rupiah at 15,000 to the dollar is a psychological level and “Indonesia’s pains are unlikely to end there.” “More rate hikes still remain in the offing, as the escalations of trade wars and gains in oil prices from the impending U.S. sanctions on Iran, due November, will keep the rupiah at risk,” she said.