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On 08 October 2019 - US, Europe Sink as US-China trade tensions flare up

Anne D Picker

Anne D Picker - Econoday

Asian shares higher after extended holiday.

US markets

Shares dropped Tuesday as tensions resurface in force between the US and China, pushing the Dow down 1.2 percent and the Nasdaq down 1.7 percent. The US announced trade restrictions on 28 Chinese security organizations, including artificial intelligence firms, that the Trump administration said are implicated in human rights violations targeting China's Uighurs and other predominantly Muslim ethnic minorities. The news followed reports that Chinese officials are not optimistic over new trade talks that are set to begin Thursday in Washington.

Another key focus of the session was Jerome Powell who announced that the Federal Reserve, in reaction to volatility in the repo market, will begin adding liquidity to the money market through direct purchases of short-term T-bills, a move that would have no significance for monetary policy. Regarding monetary policy, Powell sounded hawkish, describing the labor market as favorable and inflation as "gradually" firming the last few months. He said the Fed's two rate cuts so far this year (25 basis points each in July and September) are providing support for the outlook, in contrast to trade uncertainties and Brexit which are posing risks to the outlook.

Boing dropped 0.7 percent on reports of further delays in the resumption of 737 Max flights, while Domino's Pizza rose 4.7 percent after posting earnings and sales. Shares of Chinese listed stocks posted declines in the session.

In economic news, producer prices proved very subdued in September and are pointing to no more than modest pressure for Thursday's report on consumer prices. Other data included the small business optimism report where declines are deepening amid business uncertainty and a lack of commitment to business spending. Tariffs are cited by 30 percent of this sample as a negative for their business.

These data reflect observations at 4:00 PM US ET: Dated Brent spot crude oil fell 41 cents to US$58.03, while gold rose US$6.00 to US$1,510.40. The US dollar rose against most major currencies. The yield on the US Treasury 30-year bond yield fell 1 basis point to 2.04 percent while the yield on the 10-year note fell 2 basis points to 1.54 percent.

European markets

Brexit uncertainties together with heightened US-China trade frictions sent European stocks sharply lower Tuesday. The FTSE fell 0.8 percent with Germany's Dax down 1.1 percent and France's CAC sinking 1.2 percent.

Weighing on the FTSE and the pound were reports that Germany's Angela Merkel, citing the UK's plan for Northern Ireland that would modify the Republic of Ireland's custom standing in the EU, has told Boris Johnson that a Brexit deal looks highly unlikely. Johnson intends, also according to reports, to challenge the Benn Act in Supreme court, a law that would require the prime minister to try and delay Brexit if withdrawal agreement is not reached by Oct. 19.

German industrial production led European economic data, posting unexpected growth of 0.3 percent in August that, nevertheless, only shaved year-on-year contraction slightly, to 4.0 percent versus 4.2 percent in July. That said, the monthly performance included strength for both intermediates and capital goods. The news follows yesterday's data on German manufacturing orders which weakened sharply and are not pointing to further strength for industrial production.

Asia Pacific markets

Major Asian markets closed higher Tuesday as trading resumed in China and Hong Kong after public holidays over the last week. The Shanghai Composite index closed up 0.3 percent, as did Hong Kong’s Hang Seng index, while Australia’s All Ordinaries index rose 0.4 percent. Japanese shares were among the strongest performers in the region, with the Nikkei index up 1.0 percent and the Topix index 0.9 percent higher, boosted by strong gains for semiconductor manufacturers. This followed better-than-expected profit guidance from Samsung, with Korea’s Kospi index advancing 1.2 percent on the day.

Another round of US-China trade talks later in the week remain a key focus of attention for regional investors, with concerns also rising about the impact of civil unrest in Hong Kong on US-China commercial relationships. Chinese state television CCTV announced that it will suspend the broadcast of National Basketball Association matches after the general manager of the Houston Rockets team expressed support for Hong Kong protests last week. Other Chinese companies have also reacted negatively to the news, which follows news last week that Starbucks Corp is facing pressure to review its franchise agreement with a Hong Kong restaurant chain after its owner criticised the protests.

The Markit China services PMI fell from 52.1 in August to a seven-month low of 51.3 in September, mainly reflecting weaker new export orders and a drop in business confidence. The equivalent survey for the manufacturing index, released last week, showed an increase in the headline index, which was enough to push the composite index up from 51.6 in August to 51.9 in September, its highest level since April. Together these surveys suggest that recent policy measures aimed at offsetting the impact of US-China trade tensions may have helped to stabilise domestic activity. Official activity data for September are scheduled for release later in the month, but officials have indicated that retail sales have posted solid growth over national holidays during the last week.

Household spending in Japan, in real terms, increased 1.0 percent on the year in August picking up from growth of 0.8 percent in July but below the consensus forecast for an increase of 1.2 percent. Spending on food was stronger, but this was offset by weaker spending on utilities and housing, and a measure of core spending showed slower growth of 0.5 percent on the year in August, down from 1.1 percent previously.

Looking forward

Japanese producer prices are due Wednesday for Asian and European calendars that are otherwise quiet. In the US, job openings from the JOLTS report are due as are minutes from the FOMC's September meeting.

Global stock markets

 

Index

7 Oct 2019

8 Oct 2019

Daily Change

% Change Daily

North America

 

 

 

 

 

United States

Dow

26478.02

26164.04

-313.98

-1.2

 

NASDAQ

7956.29

7823.78

-132.51

-1.7

 

S&P 500

2938.79

2893.06

-45.73

-1.6

Canada

S&P/TSX Comp

16424.52

16293.95

-130.57

-0.8

Europe

 

 

 

 

 

UK

FTSE 100

7197.88

7143.15

-54.73

-0.8

France

CAC

5521.61

5456.62

-64.99

-1.2

Germany

XETRA DAX

12097.43

11970.2

-127.23

-1.1

Italy

MIB

21652.15

21405.73

-246.42

-1.1

Spain

Ibex 35

9044.1

8940.1

-104.00

-1.2

Sweden

OMX Stockholm 30

1618

1605.69

-12.31

-0.8

Switzerland

SMI

9914.06

9800.24

-113.82

-1.2

Asia/Pacific

 

 

 

 

 

Australia

All Ordinaries

6686.74

6713.69

26.95

0.4

Japan

Nikkei 225

21375.25

21587.78

212.53

1.0

 

Topix

1572.75

1586.5

13.75

0.9

Hong Kong

Hang Seng

*

25893.4

72.37

0.3

S. Korea

Kospi

2021.73

2046.25

24.52

1.2

Singapore

STI

3099.48

3110.85

11.37

0.4

China

Shanghai Comp

*

2913.57

8.38

0.3

Taiwan

TAIEX

10935.06

11017.31

82.25

0.8

India

Sensex 30

37531.98

*

*

*

*Markets closed

 

 

 

 

 

Note: all releases are listed in local time.

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