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On 31 October 2019 - US, Europe off on trade worries; Asia mixed

Anne D Picker

Anne D Picker - Econoday

Latest US company earnings mostly strong.

US markets

US equities slipped Thursday on renewed US-China trade worries, despite positive earnings from Apple and other market heavyweights. The Dow industrials declined 0.5 percent, the S&P 500 fell 0.3 percent, and the NASDAQ was off 0.1 percent.

Risk assets reacted badly and US Treasuries rallied on a Bloomberg report that Chinese officials doubted the US and China could reach a long-term trade pact. Among sectors: materials, industrials, and financials were the worst performers, while communications services and utilities held up best.

Among companies reporting, Facebook rose 1.9 percent on a big earnings and revenues beat. Apple gained 2.3 percent on an earnings and revenues beat, and after projecting strong holiday sales. Kraft Heinz, the food company, rallied 13.5 percent on an earnings beat and strong overseas growth. Starbucks recovered early losses to gain 0.5 percent after reporting an earnings miss and weaker guidance.

In US economic news, moderate is the theme from September's sweep of personal income, consumer spending, and PCE inflation data. Core PCE prices missed monthly expectations at no change though the year-on-year rate did make the consensus at 1.7 percent. Income moderated 2 tenths in September to an as-expected 0.3 percent, with the wages & salaries component unchanged in a very soft reading that, however, followed an outsized 0.6 percent gain in the prior month. Personal consumption rose an as-expected 0.2 percent.

These data reflect observations at 4:00 PM US ET: Dated Brent spot crude oil fell 32 cents to US$60.23, while gold rose by US$15.70 to US$1,514.00. The US dollar fell against most major currencies. The US Treasury 30-year bond yield was down 7 basis points to 2.18 percent while the 10-year note yield fell 9 basis points to 1.68 percent.

European markets

Most major European equities indexes fell Thursday as worries about US-China trade returned on a report that Chinese officials doubted the two sides could reach a long-term trade pact. The Europe-wide STOXX 600 fell 0.5 percent, the German DAX declined 0.3 percent, the French CAC declined 0.6 percent and the UK FTSE-100 dropped 1.1 percent.

Mining shares, autos, and oil & gas underperformed on the trade worries, while travel & leisure, utilities, and telecom popped up. UK shares were hit by a big drop in Royal Dutch Shell, the oil super-major, which fell 4.5 percent after warning bad economic conditions would limit its share buybacks.

Among other companies in focus, Air France-KLM fell 1 percent after warning of weakening travel. Fiat Chrysler rose 5.9 percent on news of a merger with Peugeot owner PSA, which fell 13 percent. Enagas, the Spanish utility, rose 5.5 percent on news regulators will allow higher gas grid profits.

In economic news, the Eurozone economy had a subdued third quarter. Preliminary flash GDP shows a second successive and very modest 0.2 percent quarterly gain in total output, a tick above the market consensus but still equaling the worst performance since it last contracted back at the start of 2013. Annual workday adjusted growth was 1.1 percent, down from 1.2 percent in the previous period. In a separate report, Eurozone inflation fell again in October. The flash report put the annual rate at 0.7 percent, down a tick from its 0.8 percent final September mark, in line with market expectations and its lowest reading since November 2016

Asia Pacific markets

Major Asian markets posted mixed but generally moderate moves Thursday. Investor sentiment was supported by comments from Federal Reserve Chair Jay Powell after the FOMC’s decision to cut rates Wednesday and firmer guidance from the Bank of Japan that policy rates will stay at or below current levels until price pressures pick up decisively. Chinese data, however, showed weaker conditions in both the manufacturing and non-manufacturing sectors in October.

Hong Kong’s Hang Seng index was the strongest performer in the region, up 0.9 percent, while Japan’s Nikkei and Topix indices advanced 0.4 percent and 0.1 percent respectively. The Shanghai Composite index fell 0.4 percent, while Australia’s All Ordinaries index closed also down 0.3 percent on the day.

The Bank of Japan left its short-term policy rate for excess reserves on hold at minus 0.1 percent at its policy meeting concluding Thursday, in line with the consensus forecast. Long-term rates and the pace of asset purchases were also unchanged. Officials also concluded that the risk of losing momentum in their efforts to lift inflation has not increased though they continue to pay "close attention". Having previously promised to keep rates at current levels until early 2020 at least, the BoJ now advises that rates will stay at or below current levels for as long as needed to keep up inflation.

Japan's industrial production index advanced 1.4 percent on the month (seasonally adjusted) after falling 1.2 percent in August, stronger than the consensus forecast for an increase of 0.5 percent. The rebound in headline industrial production likely reflected the impact of stronger spending by consumers in September ahead of an increase in consumption tax rates at the start of October.

China's CFLP Manufacturing PMI index fell from 49.8 in September to 49.3 in October, below the consensus forecast of 49.8 and indicating that activity in the sector contracted for the sixth consecutive month. The CFLP Non-Manufacturing PMI index fell from 53.7 in September to 52.8 in October, its lowest level since January 2016. Markit PMI surveys for the manufacturing and services sector will be published in coming days.

Data released after the Asia trading session showed Hong Kong's economy contracted for the second consecutive quarter in the three months to September, with civil unrest in recent months exacerbating the impact of weak Chinese demand and ongoing global trade tensions. GDP fell 3.2 percent on the quarter, the sharpest pace since the start of 2009, after a decline of 0.4 percent in the three months to March, with year on-year growth slowing from an increase of 0.5 percent to a fall of 2.9 percent, again the weakest since 2009.

Looking forward

On Friday in Asia/Pacific, Chinese PMI manufacturing, Indian PMI manufacturing, Japanese PMI manufacturing, and Japanese unemployment rate figures are scheduled. In Europe, Eurozone PMI manufacturing, French PMI manufacturing, German PMI manufacturing, Swiss CPI, Swiss adjusted real retail sales, Swiss SVME purchasing managers, and UK CIPS/PMI manufacturing data are scheduled. In the US, employment report, construction spending, and ISM manufacturing figures are due.

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Note: all releases are listed in local time.

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