On 04 December 2018 - Stocks give back Monday’s gains

Anne D Picker

Anne D Picker - Econoday

5 December 2018

Trade jitters return

US markets

US stocks gave back Monday’s gains and more on Tuesday after President Trump sowed confusion over the status of a truce in the trade war between the United States and China, while the bond market, often considered a safe haven for investors, sent a stark warning about expectations for an economic slowdown. All three major indices lost more than 3 percent. The Dow Jones industrials lost 3.1 percent, the S&P retreated 3.2 percent and the Nasdaq tumbled 3.8 percent. Profit taking also played a part. 

The warning from the bond market came through the yield curve — the difference between interest rates on short-term United States government bonds — two-year notes and longer term bonds— 10-year Treasuries. The gap between the two-year and 10-year yields has decreased to less than 0.12 percentage points — the lowest it has been since before the financial crisis. 

The financial sector was one of the hardest hit segments of the market, tumbling more than 4 percent. A flattening yield curve hamstrings profitability for banks, which benefit from a wide difference between short-term rates, which they pay to borrow, and long-term rates, which they charge their customers. Stocks of cyclical companies — which are heavily reliant on economic growth for sales and profits — also slumped. Shares of airlines and automakers and auto parts tumbled. Boeing and Caterpillar tumbled. Apple dropped on bearish comments from a broker.

On Tuesday, New York Fed President John Williams said the US central bank should expect to continue raising interest rates “over the next year or so” even while it pays close attention to possible risks highlighted by financial markets.

These data reflect observations at 4:00 PM US ET. Gold was up US$4.10 to US$1,243.70. Copper futures were down 1.85 percent to US$2.76. WTI spot crude was unchanged at US$52.95. Dated Brent spot crude was down 1 US cents to US$61.68. The US dollar was up against the pound and the Canadian and Australian dollars. It retreated against the Swiss franc and yen and was virtually unchanged against the euro. The Dollar Index was up 0.42 percent. The yield on the US Treasury 30 year bond was down 10 basis points to 3.17 percent while the 10 year note was down 7 basis points to 2.91 percent. 

European markets

European stocks changed direction and tumbled Tuesday after rallying Monday. Some investors locked in some profits. Traders initially reacted positively to the trade war truce reached by President Donald Trump and Chinese President Xi Jinping at the G20 summit over the weekend. However, uncertainty about whether the 90-day truce will give the U.S. and China enough time to reach a long-term trade agreement appears to have inspired traders to cash in on yesterday's strong upward move. News that US Trade Representative Robert Lighthizer, one of Trump's more hawkish advisors on trade with China, has been tapped to lead the negotiations has added to the skepticism.

The FTSE was down 0.6 percent, the CAC slid 0.8 percent, the DAX dropped 1.1 percent and the SMI slipped 0.2 percent. JCDecaux declined on a brokerage downgrade. Ryanair Holdings fell after reporting positive traffic figures for November. Ferguson, a specialist distributor of plumbing and heating products, tumbled despite posting solid first-quarter results. Both BP and Royal Dutch Shell advanced.

IG Group Holdings sank after the online trading company said it expects revenue in the first half to be around 6 percent lower than last year. Danske Bank slid in Copenhagen — the bank said it has built a capital buffer of as much as US$2.7 billion to absorb potential fines in a money laundering case. UBS, Crédit Suisse and Julius Baer declined along with the Swatch Group and Richemont. However, Nestlé and Novartis gained but Roche slid.

Eurozone producer price inflation accelerated further in October, defying expectations, figures from Eurostat showed Tuesday. Producer prices rose 4.9 percent year-on-year after a revised 4.6 percent in September. Economists had expected the rate to remain unchanged at September's original figure of 4.5 percent.

British construction sector expanded at the fastest pace in four months in November, thanks to an increase in new work and consequent gains in job creation, though Brexit concerns damped expectations for the months ahead. The CIPS construction PMI climbed to 53.4 from 53.2 in October. Asia Pacific Markets

Asian stocks closed mostly lower on Tuesday as the initial euphoria over the US/China truce on import tariffs subsided and investors wondered if a 90-day tariff truce was enough for the two countries to resolve their differences on a range of issues. US President Donald Trump has appointed Robert Lighthizer, one of his cabinet's most strident trade hawks, to oversee the next round of trade negotiations with China. 

The Shanghai Composite was 0.4 percent higher while the Hang Seng was up 0.3 percent. According to the head of the People’s Bank of China in an article in the China Finance magazine, the PBoC would keep its monetary policy flexible and adjust it appropriately according to changes in the country's economic situation. 

Both the Nikkei and Topix tumbled 2.4 percent on profit taking after a strong rally on Monday. Falling US yields on expectations of slower pace of Federal Reserve rate increases pulled down financials, with Mitsubishi UFJ Financial Group, Sumitomo Mitsui Financial Group and Dai-ichi Life Holdings declining. Companies sensitive to China fell, with Yaskawa Electric and Hitachi Construction Machinery tumbling. Sharp plunged on a Nikkei report that it has laid off more than 3,000 foreign workers in Japan. 

Both the S&P/ASX and All Ordinaries were down 1.0 percent on profit taking. Financials led the decliners, with the big four banks ending lower. Metcash slumped to extend losses from the previous session after the company warned of tough times ahead in the supermarket sector. Wesfarmers also was lower. The Reserve Bank of Australia left it policy interest rate on hold at a 1.5 percent, citing sluggish wage growth and low inflation. The RBA said that the low level of interest rates is continuing to support the Australian economy.

The Kospi was down 0.8 percent, dragged down by large-cap technology, auto and steel companies. The Sensex slid 0.3 percent. 

Looking forward

The Reserve Bank of India announces its monetary policy decision. Australia releases third quarter GDP. November composite PMIs will be released for Japan, France, Germany and the Eurozone. Services PMI will be posted for the UK. The Eurozone also posts October retail sales. The Bank of Canada will announce its monetary policy decision. In the US, the NYSE and Nasdaq will be closed for the day of mourning for late president George HW Bush. All indicator releases are postponed until Thursday with the exception of the Beige Book.

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Data Source – Haver Analytics

Note - all releases are listed in local time.

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