On 05 March, 2018 - Shares in the US and Europe advanced, while those in Asia retreated

Anne D Picker
Anne D Picker
Econoday6 March 2018

Investors continued to be concerned about a potential trade war.

US markets

US stocks rallied Monday — traders overlooked the possibility of a potential trade war to focus instead on the rally in energy prices and better-than-expected economic data. The three major indices rose on bets the threat was just a negotiating tool after Trump said Canada and Mexico could avoid his proposed tariffs if they ceded ground on the North American Free Trade Agreement (NAFTA). And Speaker of the House Paul Ryan urged the administration not to move forward on the tariffs, citing risks to the economy. The threat last week of import tariffs of 25 percent on steel and 10 percent on aluminum ignited a selloff on Thursday in a market that was already on edge over rising US interest rates and bond yields. The Dow Jones industrials were up 1.4 percent, the S&P added 1.1 percent and the Nasdaq was 1.0 percent higher. Trading activity was somewhat subdued as investors looked ahead to Friday’s monthly employment report.

Facebook, Amazon and JPMorgan advanced. Energy stocks also rose in tandem with the rally in crude prices thanks to forecasts for robust demand growth and concerns that OPEC will not be able to increase its production capacity. Clearside Biomedical jumped after the drug developer's eye drug met the main goal in a late-stage study, while Dermira plunged after the company abandoned its acne drug. Caterpillar advanced. General Electric and Boeing also traded higher.

The February ISM non-manufacturing index edged down to a reading of 59.5 from 59.9 in January. The modest decrease was partly due to a slowdown in the pace of job growth in the service sector as the employment index dropped to 55.0 in February from 61.6 I January.

These data reflect observations at 4:00 PM US ET. Gold at the afternoon London fixing was down US$1.90 to US$1,320.40. Copper futures were up 0.11 percent to US$3.13. WTI spot crude was up US$1.34 to US$62.59. Dated Brent spot crude was up US$1.18 to US$65.55. The US dollar was up against the yen, Swiss franc and the Canadian dollar. It retreated against the pound and the Australian dollar. It was virtually unchanged against the euro. The Dollar Index was up 0.1 percent. The yield on the US Treasury 30 year bond was up 1 basis point to 3.15 percent while the 10 year note was up 2 basis points to 2.88 percent.

European markets

European stock indices advanced with the exception of the MIB as the prospect of a hung Parliament in Italy looks increasingly likely. Nearly half of the votes in Sunday's Italian general election went to populist parties. The official tally has yet to be confirmed, but it appears neither side has won a clear majority. Meanwhile, Germany's Social Democratic party voted to join a coalition agreement with Chancellor Angela Merkel. Investors were cautious Monday about a possible global trade war. US President Donald Trump plans to impose tariffs on steel and aluminum imports. The FTSE was up 0.7 percent, the CAC gained 0.6 percent, the DAX jumped 1.5 percent and the SMI added 2.1 percent.

Italy’s FTSE MIB was down 0.4 percent to November lows, dragged down by weakness among its banks. Italy faces a prolonged period of political instability after voters delivered a hung parliament. Italy’s parliament will meet for the first time on March 23 and President Sergio Mattarella is not expected to open formal talks on forming a government until early April. Italian banks were lower — they are seen as a proxy for political risk given their large government bond holdings. The situation in Italy was in strong contrast to Germany where Social Democrats voted to re-enter a grand coalition with Chancellor Merkel’s conservatives, signalling an end to political uncertainty there.

Airbus rose as possible job cuts loomed. AXA sank after the insurer agreed to acquire XL Group, a global Property & Casualty commercial lines insurer for total consideration of US$15.3 billion or €12.4 billion in cash. Royal Bank of Scotland climbed after reports that it is edging towards a final deal over mis-selling of RMBS prior to the 2008 financial crisis.

Tesco advanced on a broker upgrade. Wm Morrison also advanced. LafargeHolcim rebounded after dropping last week after it posted full year results. Logitech, Aryzta, Geberit Givaudan and Vifor Pharma finished higher along with Richemont and Swatch in Zurich. Also advancing were Novartis, Roche and Nestlé.

Eurozone February composite output index declined to 57.1 from January's near 12-year high of 58.8. Eurozone retail sales dropped marginally in January. The volume of retail trade slipped a monthly 0.1 percent in January, following December's 1.0 percent decline. UK February services PMI climbed to a reading of 54.5 from 53.0 the month before.

Asia Pacific Markets

Most stock indices declined Monday as fears of a global trade war persisted and the prospect of a hung Parliament in Italy looked increasingly likely.

The Shanghai Composite edged up 0.1 percent as Chinese leaders headed to an annual parliament meeting and a survey showed activity in China's services sector cooled slightly in February. The Caixin services PMI reading was 54.2, down from 54.7 in January. China maintained its growth target for 2018, despite the economy surpassing the goal last year, as the government tries to contain corporate debt and rein in pollution. Premier Li Keqiang set the growth target at 'around 6.5 percent' for 2018, unchanged from the last year's target. The Hang Seng tumbled 2.3 percent, closing at a near five month low.

The Nikkei was down 0.7 percent and the Topix was 0.8 percent lower. Steelmakers including Kobe Steel, Nippon Steel, Sumitomo Metal and JFE Holdings declined. February services sector PMI reading edged down to 51.7 from 51.9 in January.

Masazumi Wakatabe and Masayoshi Amamiya, the government's nominees for next Bank of Japan deputy governors testified before the lower house of parliament. Masazumi Wakatabe said that the BoJ must avoid a premature exit from its ultra-easy policy and consider ramping up stimulus if needed to pull the economy out of deflation. Wakatabe, an academic known as a vocal advocate of aggressive easing, said the merits of the BoJ’s stimulus program “far exceeded” the costs, brushing aside criticism from some analysts that prolonged monetary easing was straining Japan’s banking system.

Amamiya, the other deputy nominee who has served as Kuroda’s right-hand man as the BoJ’s executive director overseeing monetary policy, mostly echoed the governor’s views on monetary policy — a sign the two will continue to work hand in hand on key policy decisions. Elaborating on what the BoJ’s exit strategy could look like, he said the bank had the necessary tools to engineer a smooth exit once the appropriate time to do so comes.

Central bank governor Haruhiko Kuroda on Friday rattled markets by commenting for the first time on the prospect of an exit from accommodative policy if his inflation target was met, sending the yen higher and bond prices lower.

The S&P/ASX declined 0.6 percent while the All Ordinaries was 0.5 percent lower. Miners BHP Billiton and Rio Tinto retreated amid controversy over Donald Trump's announcement of tariffs on steel and aluminum imports. The big four banks declined along with energy majors Origin Energy, Oil Search and Santos.

The Kospi was down 1.1 percent as fears of a potential trade war and political uncertainty in Italy dented investors' appetite for riskier assets. The Sensex dropped 0.9 percent.

Looking forward

The Reserve Bank of Australia announces its monetary policy decision. Australia releases January retail sales. The US posts January factory orders.

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Data Source — Haver Analytics




Note: All releases are listed in local time.

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