IMF pessimism + trade tensions = sickly stocks
Pessimism about global growth drove down world shares and commodity markets on Tuesday and left investors seeking refuge in the dollar, government bonds and gold.
The International Monetary Fund’s warning of a darkening outlook on Monday after China’s confirmation of its slowest growth rate in nearly 30 years and amid more head-scratching over Brexit continued to weigh on the mood.
European shares had followed Asia into the red <.STOXX> with disappointing earnings from Swiss bank UBS also adding extra gloom after Europe’s banking sector <.SX7E> saw nearly 30 percent wiped off its value last year.[.EU]
In its World Economic Outlook report, the IMF predicted the global economy would grow at 3.5 percent in 2019 and 3.6 percent in 2020, down 0.2 and 0.1 percentage point respectively from last October’s forecasts.
The downgrade mainly reflected signs of weakness in Europe, with Germany hurt by new car emission rules, Italy under market pressure due to Rome’s recent budget standoff with the European Union and Brexit hanging over the bloc as well.
“We have seen a little bit of a pull back, but whether it’s the IMF growth downgrade or China related is neither here nor there,” said CMC Markets’ senior analyst Michael Hewson.
He pointed to the strong and sudden rebound that markets like Germany’s Dax <.GDAXI> have seen since the end of December as well as other major global indexes.
“We are at the top end of the range for this year and given the global uncertainty, investors are probably taking the view that it is probably wise to take a bit of profit off the table.”
Futures markets were pointing to a weak start for the United States later with falls of 0.8 percent for the S&P 500 and nearly 1 percent for the Nasdaq seen.
Another development nibbling at sentiment was news that the United States plans to proceed with the formal extradition from Canada of Chinese tech giant Huawei executive Meng Wanzhou.
Meng, who is also the daughter of Huawei’s founder Ren Zhengfei, was arrested in early December at the request of the United States over alleged violations of sanctions on Iran. She was released on bail and is due in court in Vancouver on Feb. 6.
Asia’s overnight losses had been led by Chinese shares, with the blue-chip index <.CSI300> off 1.2 percent. Japan’s Nikkei <.N225> skidded 0.5 percent too, while Hong Kong and Sydney closed down 0.8 and 0.5 percent <.AXJO>. [.SS][.T]
In another sign of risk aversion, the Australian dollar, often used as a liquid proxy for China investments, eased 0.4 percent to $0.7123, putting it on track for a third straight session of losses.
The same worries had also pushed the New Zealand dollar down for a seventh session and copper, which is used in everything from electrical wiring and water pipes to cars, drifting lower in the metals markets. [MET/L]
The dollar <.DXY> held at a near three-week high as investors sought the relative safety of the U.S. currency.[/FRX]
That kept the euro pegged back at 1.1360 and reapplied pressure on the main emerging market currencies following a decent start to the year for most of them.
Sterling was a shade firmer at $1.2910 after data showed British workers’ pay growth hit a new 10-year high and employment had grown by much more than expected in the three months to the end of November.
Otherwise traders were still waiting to see whether UK Prime Minister Theresa May can push her Brexit plans through the country’s bitterly divided parliament.
May had offered tweaks on Monday by seeking further concessions from the European Union on a backup plan to avoid a hard border between the British-administered province of Northern Ireland and the Irish Republic.
But she had also refused to rule out leaving the EU at the end of March without any deal.
“Any upside for sterling in the near term may be limited,” said Capital Economics analyst Liam Peach. “Uncertainty would continue during the extended negotiations and there is no guarantee that it would last for only a short period of time.”
There was demand too for the safe-haven yen with the Japanese currency last at 109.40 per dollar. Against a basket of currencies, the dollar was barely changed at 96.393 <.DXY>.
In commodities, the global growth worries pulled oil prices lower with Brent down 55 cents at $62.19 and U.S. crude futures off 39 cents at $53.41. [O/R]
Euro zone government bond yields also fell, with Germany’s 10-year yields down at 0.22 percent <DE10YT=RR> from Friday’s one-month high of 0.28 percent, and Spain’s helped to a near six-month low by record demand at a new bond sale.
The European Central Bank holds its first meeting of the year on Thursday.
Source: Reuters (Reporting by Marc Jones; Additional reporting by Swati Pandey in Sydney; Editing by Hugh Lawson)