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On 7 May 2019 - Global stocks fall sharply; key week for US-China trade

Anne D Picker

Anne D Picker - Econoday

EC Commission shaves outlook; RBA refrains from immediate rate cut.

US markets

Shares fell sharply amid concern of an escalating trade war between the US and China. The Dow closed down 1.8 percent but off its lows of over 2 percent. The S&P fell 1.7 percent and the Nasdaq 2.0 percent.

Adding to investor uncertainty was Secretary of State's Mike Pompeo sudden and unexplained departure from Germany amid speculation he was possibly heading to the Middle East for issues related to Iran.

With higher tariffs on $200 billion of Chinese goods set to go in effect on Friday, the pace of trade developments is taking on more urgent importance. China confirmed that Vice Premier Liu He, the country's lead negotiator, will be in Washington on Thursday and Friday as previously planned.

The first-quarter earnings season is now winding down and, like other recent quarters, proved mostly upbeat. American International Group jumped sharply after the insurer beat quarterly estimates, though drugmaker Regeneron Pharmaceuticals and Mylan both fell sharply after missing estimates.

Economic data showed a 4.8 percent surge in job openings in March to 7.488 million at the same time that hires fell 0.6 percent to 5.660 million. The gap between the two stands at a record 1.828 million. Year-on-year, openings are up 8.6 percent vs only a 0.6 percent rise for hires. A large gap between openings and hires points to the risk not only of wage inflation but also that labor shortages may be holding back economic growth.

These data reflect observations at 4:00 PM US ET. Dated Brent spot crude was down US$1.94 to $69.60 while gold was US$3.40 higher at $1,284.50. The US dollar fell against the yen and the Australian dollar but rose versus the Canadian dollar, the pound, the euro, the yuan, and the Swiss franc. The yield on the US Treasury 30-year bond fell 5 basis points to 2.86 percent while the yield on the 10-year note also fell 5 basis points to 2.45 percent.

European markets

Uncertainty over US-China trade developments together with a small downgrade to Eurozone growth tripped heavy selling in European shares. The DAX, CAC and FTSE all fell a steep 1.6 percent in the session.

The European Commission shaved 1 tenth from its February estimate of 2019 Eurozone growth which is now pegged at 1.2 percent, and also cut in half its estimate for Italy to marginal growth of only 0.1 percent. Italy's FTSE MIB ended with a 0.9 percent loss. And political questions pulled the Turkish lira sharply lower on news of a revote in Istanbul elections.

Weakness in Germany remains a chief concern over the continent's economic outlook. Orders at German manufacturers rose a smaller-than-expected 0.6 percent in March to make only a small dent in February's 4.0 percent slump. This warns of weak production data to come for a manufacturing sector that will struggle to emerge from recession this quarter. Orders are 6.1 percent below a year ago and at their weakest level since January 2017 while for the first quarter as whole, orders came in a sizeable 4.1 percent below their level in the fourth quarter.

Trade data out of France were mixed. March deficit totaled €5.32 billion vs a €4.13 billion shortfall in February. But the deterioration masked a monthly 1.1 percent rise in exports that, however, was easily offset by a 3.6 percent jump in imports. France's first quarter gap stood at €13.69 billion, a 10.6 percent increase versus fourth quarter 2018 and help explain why total net exports subtracted 0.3 percentage points from the nation's first quarter GDP.

In company news, Italian online broker FinecoBank fell sharply after Italy's Unicredit warned it may cut its stake in the firm. Germany's BMW also fell after reporting a decline in quarterly profits.

Asia Pacific Markets

Asian equities traded mixed Tuesday as Chinese and Singapore markets recovered some of Monday's plunge as US-China trade news seemed less dire. Other markets weakened including Korea and Japan. Tokyo markets returned from holidays.

The Shanghai composite rose 0.7 percent, a modest recovery from Monday's nearly 6 percent drop. Hong Kong's Hang Seng index bounced 0.5 percent higher following Monday's 3 percent decline. The rebound reflected news that the US-China talks would resume Thursday in Washington as scheduled, with Vice Premier Liu He leading the delegation. Talks are resuming following US threats to impose tariffs on Friday, and comments from US trade officials late Monday that China has backtracked on its trade commitments. Singapore rose by 0.7 percent after falling 3.4 percent Monday.

Japan's Nikkei 225 index fell by 1.5 percent as Tokyo markets returned from a 10-day holiday. Manufacturers and heavy equipment makers such as Fanuc and Komatsu, with big exposure to China, led the declines. On the positive side, Sony rallied as it projected profits exceeding market expectations. Korea's KOSPI fell 0.9 percent.

Australia's All Ordinaries index rose by 0.2 percent, led by miners such as Fortescue Metals and Rio Tinto, as iron prices surged on supply concerns. The gains were limited as the Reserve Bank of Australia dashed hopes for an immediate rate cut. Financial shares gave up earlier gains on disappointment at the RBA policy announcement, with Commonwealth Bank of Australia off 0.4 percent.

The RBA statement suggested a neutral stance for now but cited weaker-than-expected inflation and suggested a rate cut in the future. The statement described the outlook for the global economy as "reasonable" but said downside risks have increased. Turning to the domestic outlook, officials once again noted strong labour market conditions and a "welcome" pick-up in wages growth but also acknowledged that weakness in household incomes and the ongoing "adjustment" in housing markets had impacted consumer spending.

In economic data, Japan's Nikkei Manufacturing PMI index rose slightly to a three-month high of 50.2 in April to indicate slight expansion in the sector. Yet conditions in the sector remain weak, with respondents reporting that output and new orders again fell, especially new export orders. In Australian data for March, the nation's trade surplus narrowed on weakness in exports while retail sales were mixed, slowing on a monthly basis but improving to 3.5 percent growth on the year.

Looking forward

Bank of Japan minutes will open Wednesday's global session followed by a policy announcement from the Bank of New Zealand. Trade data from China are due but no specific time or date has been set. Industrial production will be posted in Germany and housing starts in Canada. The US calendar is light but will include weekly data on petroleum inventories.

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Data Source — Haver Analytics




Note: all releases are listed in local time.

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