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On 05 August 2019 - US, Europe, Asia drop sharply as US-China trade war escalates

Anne D Picker

Anne D Picker - Econoday

Chinese yuan move below 7 per dollar raises worry about currency war.

US markets

More bad news on the US-China trade front hit US stocks Monday, as China allowed its currency, the yuan, to drop below the key 7 level vs. the dollar at the same imposing imposed new limits on purchases of US farm goods, two steps sure to upset President Trump. 

The Dow industrials dropped 2.9 percent, the S&P 500 fell 3 percent, and the NASDAQ was off 3.5 percent. US Treasury coupons rallied, with yields down 9-11 basis points, while gold surged on the flight from risk. The dollar was a notable loser as well, with ICE dollar index futures off 0.5 percent.

The stock selloff was across the board, with cyclicals the worst performers, led by petroleum exploration and production, semiconductors, tech hardware, airlines, banks, autos, and machinery. Defensive sectors, including precious metals miners and utilities, held up the best. 

Communications services got whacked, especially the mega-cap internet champions. Google was off 3.4 percent, Amazon off 3.1 percent, and Facebook down 3.9 percent. Apple was off 5.3 percent.

Among companies reporting earnings, Tyson Foods rose 5.1 percent after its earnings and guidance surprised on the upside. Pharma Allakos rocketed 110 percent on good news from its treatments for gastrointestinal diseases, and better than expected Q2 earnings.

In economic news, ISM non-manufacturing index has consistently reported very solid rates of growth but it too is at a new low, down a sizable 1.4 points in July to 53.7 for a 3-year low that comes up well short of the bottom end of Econoday's consensus range.

These data reflect observations at 4:00 PM US ET:  Dated Brent spot crude fell $1.24 to US$59.93 while gold rose US$16.20 to US$1,473.70. The US dollar dropped against most major currencies. The yield on the US Treasury 30-year bond yield dropped 10 basis points to 2.29 percent while the yield on the 10-year note fell 11 basis points to 1.73 percent.

European markets

European equities dropped again Monday on fallout from the escalation of the US-China trade war, with trade-sensitive and cyclical shares hit the hardest. The Europe-wide STOXX 600 fell 2.3 percent, the German DAX was off 1.8 percent, the French CAC lost 2.2 percent, and the UK FTSE 100 dropped 2.5 percent.  

Markets were rattled by the decline in the Chinese yuan below the key level of 7 to the dollar, which raised concern that the trade war was leading to a currency war. Concerns over Chinese retaliation against the latest US tariffs added to the gloom, including news that China was limiting purchases of US farm goods, a flashpoint for President Trump.

Basic resources shares were among the worst performers, with copper and other minerals down sharply. Other underperformers included personal and household goods, with luxury names like LVMH (down 4.3 percent) and Richemont (down 7.2 percent) notable losers. UK homebuilders suffered, with Taylor Wimpey leading decliners, down 8.1 percent.

Outperformers included chemicals and utilities, but they still declined. Among notable companies releasing quarterly results, HSBC reported better-than-expected profits, but was off 3 percent on news that it is cutting jobs and its CEO is leaving.

In economic news, final Eurozone PMI results for July confirm a worryingly weak period for business activity. The flash composite output index was unrevised at 51.5 and remains 0.7 points below final June and too close for comfort to the 50-expansion threshold.  Separately, business activity in UK services picked up a little steam in July, although growth was hardly hot. At 51.4, the sector PMI was comfortably stronger than market expectations and the fastest in the last nine months but still well short of its long-run average.

Asia Pacific Markets

Asian markets sold off heavily Monday, following the lead set by US stocks Friday with weak PMI data adding to concerns about escalating trade disputes. Hong Kong’s Hang Seng index was the worst performer in the region, closing down 2.9 percent on the day, after another weekend of civil unrest and transport disruptions were followed by a general strike Monday and comments from Chief Executive Carrie Lam that the city faces “a very dangerous situation”.

The Shanghai Composite index fell 1.6 percent on the day, while the Chinese yuan sold off to its weakest level against the US dollar since 2008, boosting speculation that Chinese authorities will use currency weakness to combat the impact of higher US tariffs. With commodity prices also down sharply, Australia’ All Ordinaries index fell 2.0 percent on the day, while Japanese shares also recorded large losses, with the Nikkei and Topix indices down 1.7 percent and 1.8 percent respectively.

Regional PMI surveys generally indicate that economic conditions across most of Asia remain impacted by trade tensions and weak external demand. Service sector PMIs showed declines in the headline index for both Japan and China but a sharp rebound in India, broadly in line with manufacturing PMIs published last week that also showed ongoing weakness in Japan and China but improved conditions in India. 

The aggregate PMIs for Hong Kong showed a sharp drop in the headline index to its lowest level since 2009, with recent civil unrest clearly weighing on activity and sentiment, while the equivalent index for Singapore rose slightly but remained at relatively weak levels.

Looking forward

On Tuesday in Asia/Pacific, the Reserve Bank of Australia monetary policy announcement is scheduled. Data reports include Australian merchandise trade, Japanese household spending, and New Zealand labor market conditions. From Europe, it’s German manufacturers’ orders. In North America, the US JOLTS report is due.

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Note: all releases are listed in local time.

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