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On 27 August 2019 - US off on recession worry; Europe, Asia better

Anne D Picker

Anne D Picker - Econoday

Skepticism rises over Trump claim that China seeks trade deal.

US markets

Major US stock indexes reversed early gains to end lower Tuesday on a rally in fixed income and yield inversion, regarded as a recession signal. Risk assets were hurt by rising skepticism over President Trump’s claim that China is eager to resume trade talks. The Dow industrials fell 0.5 percent, the S&P 500 and NASDAQ were both off 0.3 percent, and the Russell 2000 was down 1.4 percent.

At 4 pm ET, the 2-year/10-year US Treasury yield curve was inverted by 4 basis points, and the 3-month/10-year yield curve inversion reached a remarkable 49 basis points, according to data from the Wall Street Journal.

Along with the status of US-China trade, markets focused on an opinion piece by former New York Fed President Bill Dudley, who argued the Fed should not cut rates to accommodate Trump’s disruptive trade policies.

Financials were the worst performer Tuesday on the latest fall in rates and yield-curve inversion. Industrial shares, especially airlines, were also weak, with United Airlines down 2 percent. On the positive side, health care stocks outperformed, with Johnson & Johnson up by 1.5 percent on relief after a judge ruled the firm fueled the opioid epidemic but ordered a manageable fine. Among companies in focus, Altria and Phillip Morris fell 4 percent and 7.7 percent, respectively, as the two confirmed merger talks. Sentiment soured on J.M. Smucker (down 8.2 percent) after the jam-maker reported fiscal Q1 earnings-per-share of $1.36, or $1.58 ex-items, versus the $1.74 FactSet estimate.

In economic news, US consumer confidence and regional Fed manufacturing data surprised to the upside. Consumer confidence from the Conference Board did not give back very much of July's gain in August, easily beating high-end expectations with a 135.1 showing versus a revised 135.8 in July. Present situation jumped more than 6 points to 177.2 and a 19-year high. What weakness there was in the report came on the expectations side, down more than 5 points but at a still strong 107.0. Meanwhile, regional manufacturing activity bounced back in August, according to the latest survey from the Richmond Fed, whose composite index jumped 13 points from July's minus 12 to 1. The rebound was driven by shipments (up 18 points to 5) and new orders (up 20 points to 2).

These data reflect observations at 4:00 PM US ET: Dated Brent spot crude oil rose 76 cents to US$59.59, while gold rose US$13.20 to US$1,551.30. The US dollar weakened against most major currencies. The yield on the US Treasury 30-year bond yield fell 8 basis points to 1.96 percent while the yield on the 10-year note declined by 7 basis points to 1.47 percent.

European markets

Most major European equities markets rose Tuesday on hopeful news on EU-Brexit talks, relative calm on US-China trade, and progress toward a new coalition government in Italy. The Europe-wide STOXX 600 and the German DAX both gained 0.6 percent, and the French CAC was up 0.7 percent. The UK FTSE-100 declined 0.1 percent, while the FTSE MIB Italian index outperformed with a gain of 1.5 percent.

On Brexit, reports said EU officials are open to new ideas from UK Prime Minister Boris Johnson on the Irish backstop question, and negotiations could reopen. Global attention remained fixed on US-China trade amid relief the situation seems quieter, but markets appeared more skeptical of President Trump’s statement that China has asked for a resumption in talks. Meanwhile, a report that China might relax car purchase limits bolstered auto shares, including German automaker Daimler which rose 1.6 percent, and Fiat Chrysler, up 2.6 percent.

Other outperforming sectors in the Stoxx 600 included real estate and travel and leisure, plus utilities which benefited from a Barclays sector upgrade. Barclays also upgraded German alternative energy supplier EON, which rose 1.9 percent. Underperformers included financials, oil and gas, and chemicals. Among companies in focus, Norwegian Air Shuttle soared by 20 percent on an upgrade by Danske Bank.

In economic news, German flash data were unrevised in the second look at last quarter's GDP. This left the economy shrinking 0.1 percent from the previous period and annual workday adjusted growth of 0.4 percent, little more than half of the first quarter rate. Unadjusted, total output was unchanged from a year ago following an annual rise of 0.8 percent at the start of the year. In France, INSEE’s measure of sentiment in manufacturing improved marginally in August. At 102, the headline index was up just a point versus its unrevised July reading, unwinding that month's dip. The result was well short of the recent high (113) seen in January 2018 but firmer than expected and a couple of points above the long-run average.

Asia Pacific markets

Most Asian markets rebounded Tuesday after heavy losses Monday, with Wall Street gains the main guide to investor sentiment in the region. US-China trade tensions remain the dominant focus, with prospects for a resolution still unclear.

The Shanghai Composite index advanced 1.3 percent on the day while Chinese officials set the reference rate for the yuan at 7.081 against the dollar Tuesday, its weakest level in more than 11 years, as part of efforts to offset the impact of higher US tariffs on Chinese exports. Japanese shares also posted solid gains, with the Nikkei and Topix indices up 1.0 percent and 0.8 percent, respectively. Australia's All Ordinaries index rose 0.5 percent. Hong Kong's Hang Seng index was an outlier, falling 0.1 percent on the day.

The Asia data calendar was light Tuesday. Chinese industrial profits fell 1.7 percent year-to-date in July and were up 2.6 percent year-on-year, both improved from June.

Looking forward

On Wednesday in Europe, the Eurozone M3 Money Supply, German Gfk Consumer Climate, and Italian Business and Consumer Confidence reports are due. In the US, the EIA Petroleum Status report is scheduled for release.

Global stock markets

 

Index

27 Aug 2019

Daily Change

% Change Daily

North America

 

 

 

 

United States

Dow

25777.9

-120.93

-0.5

 

NASDAQ

7826.95

-26.79

-0.3

 

S&P 500

2869.16

-9.22

-0.3

Canada

S&P/TSX Comp

16183.59

84.80

0.5

Europe

 

 

 

 

UK

FTSE 100

7089.58

-5.40

-0.1

France

CAC

5387.09

36.07

0.7

Germany

XETRA DAX

11730.02

71.98

0.6

Italy

MIB

20991.3

314.47

1.5

Spain

Ibex 35

8728.9

49.70

0.6

Sweden

OMX Stockholm 30

1530.81

9.96

0.7

Switzerland

SMI

9786.08

70.25

0.7

Asia/Pacific

 

 

 

 

Australia

All Ordinaries

6565.62

34.61

0.5

Japan

Nikkei 225

20456.08

195.04

1.0

 

Topix

1489.69

11.66

0.8

Hong Kong

Hang Seng

25664.07

-16.26

-0.1

S. Korea

Kospi

1924.6

8.29

0.4

Singapore

STI

3067.52

2.19

0.1

China

Shanghai Comp

2902.19

38.62

1.3

Taiwan

TAIEX

10387.23

32.66

0.3

India

Sensex 30

37641.27

147.15

0.4

*Markets closed

 

 

 

Note: all releases are listed in local time.

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