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On 7 February 2019 - Global stocks down sharply on growth downgrades and renewed trade concerns

Anne D Picker

Anne D Picker - Econoday

Reserve Bank of India reverses policy, Bank of England on hold, and chances building for Eurozone rate cut. 

US markets

US stocks closed well down Thursday after growth downgrades in Europe and renewed uncertainty about the prospects of US-China trade negotiations. The Dow and S&P both fell 0.9 percent, while the Nasdaq closed down 1.2 percent. Nasdaq underperformance was partly driven by a sharp decline in Twitter after the social media company reported a decline in users and lowered revenue forecasts.

Renewed concerns about the outlook for US-China trade talks were among the factors weighing on investor sentiment. President Trump’s economic adviser, Larry Kudlow, told reporters that there is still a “pretty sizable distance to go” before any trade agreement can be reached. President Trump also confirmed late in the session earlier reports that he will not meet President Xi before the start of March, when US tariffs on Chinese imports are scheduled to increase from 10 percent to 25 percent. US Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer are due to visit Beijing for further negotiations early next week.

Regional banks BB&T and SunTrust both advanced after announcing merger plans which would create a combined company with around US$442 billion in assets, US$301 billion in loans and US$324 billion in deposits. Regulators are expected to approve the merger, which would make it the sixth-largest US retail bank. Authorities last year eased some of the regulations applying to banks with assets in the US$250 billion to US$700 billion range, and the newly merged bank would likely not be considered large enough to be treated as a systematically important financial institution.

Jobless claims data showed initial claims falling 19,000 in the February 2 week. Although claims data have been erratic in recent weeks due to the government shutdown, the underlying trend suggests strong demand for labour.

These data reflect observations at 4:00 PM US ET. Gold advanced US$0.80 to US$1,313.60 and dated Brent spot crude fell US$0.99 to US$61.671. The US dollar was mixed against other major currencies, advancing strongly against the Canadian dollar, gaining more moderately against the euro and the Australian dollar, flat against the yuan and Swiss franc, and posting small declines against the yen and pound. The yield on the US Treasury 30 year bond fell 4 basis points to 2.99 percent while the 10 year note fell the same amount to 2.65 percent.

European markets

European markets fell sharply on the day after the European Commission and Bank of England both lowered their domestic growth forecasts, German data printed weaker than expected, and doubts re-emerged about the prospects for US-China trade talks. The FTSE closed down 1.1 percent, the CAC fell 1.8 percent, and the DAX dropped 2.7 percent. The yield on the 10-year German bund fell 5 basis points to 0.11 percent, a two-year low.

German industrial production fell 0.4 percent on the month in December, well short of the consensus forecast for a rebound of 0.9 percent. This was the fourth consecutive drop in output, with an increase in capital good and flat energy production outweighed by a further drop in consumer goods and a sharp decline in construction activity. Industrial production fell 1.5 percent on the quarter in the three months to December, after dropping 1.7 percent in the three months to September, and prospects for the current quarter are not favourable, suggesting the sector will make another negative contribution to GDP growth.

The European Commission now forecasts the Eurozone economy to grow by 1.3 percent in 2019, well down from 1.9 percent in 2018 and its previous 2019 forecast of 1.9 percent, with growth then expected to rebound modestly to 1.6 percent in 2020, down from a previous forecast of 1.7 percent. Inflation is expected to be 1.4 percent, below the European Central bank’s target of “just below” 2.0 percent. Officials cited a range of factors for this downgrade to the outlook, including weaker Chinese growth, Brexit uncertainty, global trade tensions, civil unrest in France and fiscal uncertainty in Italy. The Commission’s forecasts are below the ECB’s forecast of 1.7 percent growth and 1.6 percent inflation in 2019, though ECB officials have indicated that they will also likely revise these lower next month, further boosting the chances that additional policy easing will be considered in coming months.

The Bank of England left policy rates on hold at its meeting Thursday, in line with expectations. Although there were suggestions that officials could change the policy stance, they retained the assessment that “an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent” would be appropriate in order to return inflation to its 2.0 percent target level. Officials acknowledged that recent data had indicated a loss of economic momentum late last year and considered this would likely extend into the first half of 2019, with slower global growth and Brexit uncertainty identified as the main factors weighing on activity and sentiment. The Bank’s growth forecast for 2019 was revised down from 1.7 percent to 1.2 percent, though officials still expect inflation to remain slightly above their 2.0 percent target. This suggests that officials remain ready to tighten policy if Brexit uncertainty is resolved, though for now that remains an open question.

UK Prime Minister Theresa May met with European Commission President Jean-Claude Juncker Thursday, pushing for concessions in order to secure the support of the UK parliament for a Brexit deal. The UK is scheduled to withdraw from the EU at the end of March, with arrangements governing the land border between the UK and the Republic of Ireland still the main obstacle to winning the support of the UK parliament for a deal. In a joint statement, the EU repeated that it would not renegotiate the deal governing the UK’s withdrawal from the EU but indicated a willingness to compromise in a future deal governing the post-Brexit relationship between the UK and the EU.

The French government recalled its ambassador to Italy on Thursday in response to what it claimed were “repeated, baseless attacks” by Italian political leaders. This follows a meeting last week between Italian Deputy Prime Minister Luigi di Maio with representatives of the “yellow vest” protest movement. In recent years, Greece and Hungary members have also withdrawn their ambassadors to fellow EU countries, but this is reported to be the first time France has recalled its ambassador to Italy since the Second World War. Italian Prime Minister Giuseppe Conte expressed hope that the dispute could be “cleared up immediately”. 

Asia Pacific Markets

Markets remained closed Thursday in China, Hong Kong, and Taiwan for lunar new year holidays. Trading resumed in Singapore and Korea with indices closing the day little changed on previous levels. Japanese markets sold off, with the Nikkei down 0.6 percent and the Topix down 0.8 percent.

India’s Sensex index closed flat on the day after the Reserve Bank of India unexpectedly cut policy rates by 25 basis points to 6.25 percent at its policy meeting. Policy rates were increased twice in mid-2018 and at the last policy meeting in December officials had retained a stance of “calibrated tightening” which suggested more rate hikes were possible. Since then, however, headline inflation has fallen to near the bottom of the RBI’s target range of 2.0 percent to 4.0 percent, the growth outlook has weakened, and a change in RBI leadership has taken place. The RBI’s new Governor, Shaktikanta Das, had indicated a greater focus on supporting growth in his public comments, and this focus was confirmed not only by the cut in policy rates but also a shift in the policy stance to “neutral”. Officials also revised down their near-term growth and inflation forecasts, suggesting they remain open to lowering rates again in upcoming meetings if inflation remains below the mid-point of the RBI's target range. The RBI’s next policy review is scheduled to take place in April.

Australia’s All Ordinaries index outperformed with a 1.1 percent gain Thursdays, with major banks continuing to rally on expectations that the government’s response to a report on financial sector misconduct will not unduly impact banks’ profitability. Trading in National Australia Bank, however, was suspended for part of the day ahead of an announcement that the bank’s CEO and chairman will resign in response to the report’s criticisms of the bank’s conduct. 

Looking forward

Japan household spending and Hong Kong PMI data will be released shortly. German trade and French and Italian industrial production data are scheduled for release Friday, with Canadian labour market data the main highlight in the Americas time-zone.

Global Stock Markets

 

Index

Feb 7 2019

Daily Change

% Change Daily

North America

United States

Dow

25169.53

-220.77

-0.9

 

NASDAQ

7288.35

-86.93

-1.2

 

S&P 500

2706.05

-25.56

-0.9

Canada

S&P/TSX Comp

15703.36

-8.95

-0.1

Europe

UK

FTSE 100

7093.58

-79.51

-1.1

France

CAC

4985.56

-93.49

-1.8

Germany

XETRA DAX

11022.02

-302.70

-2.7

Italy

MIB

19478.32

-518.15

-2.6

Spain

Ibex 35

8938.30

-162.60

-1.8

Sweden

OMX Stockholm 30

1529.28

-21.87

-1.4

Switzerland

SMI

9035.90

-107.10

-1.2

Asia/Pacific

Australia

All Ordinaries

6159.08

67.24

1.1

Japan

Nikkei 225

20751.28

-122.78

-0.6

 

Topix

1569.03

-13.10

-0.8

Hong Kong

Hang Seng

*

*

*

S. Korea

Kospi

2203.42

*

*

Singapore

STI

3200.64

*

*

China

Shanghai Comp

*

*

*

Taiwan

TAIEX

*

*

*

India

Sensex 30

36971.09

-4.14

0.0

* Markets closed
Source: Haver Analytics

Note: all releases are listed in local time.

Important Information

Econoday Inc. is a US company that provides financial commentary and indicators to industry professionals. All information provided and views expressed are those of Econoday. Reference in this document to specific securities should not be construed as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. Past performance is not a reliable indicator of future results. The value of investments can go down as well as up and investors may not get back the amount invested.