US stocks slide after Saudi oil attack


Meanwhile, US and Japan reach initial agreement on tariffs
Chief Investment Office17 Sep 2019
Photo credit: AFP Photo


US

US stocks slipped, oil surged, and investors sought out assets considered to be havens in times of trouble after a strike on Saudi Arabia’s crude production heightened geopolitical risk.

Losses for automakers helped drag the S&P 500 Index down the most in almost two weeks, though the gauge came off its lows of the day in afternoon trading. The benchmark fell 0.31% to close at 2,997.96 on Monday (16 September). Treasuries yields fell the most in three weeks.

The developments in the Middle East are testing sentiment after a bullish start to the month for global equities and other riskier assets. US President Donald Trump promised to help allies following the infrastructure attack after stating over the weekend that the US is “locked and loaded”. Several administration officials said Sunday that they had substantial evidence that Iran was to blame, not the Iranian-backed Houthi rebels in Yemen who claimed responsibility.

Meanwhile, US President Donald Trump said his administration has reached an initial trade accord with Japan over tariffs and that he intends to enter into the agreement in coming weeks.

In a notice to Congress on Monday, Trump also said the US will be entering an “executive agreement” with Japan over digital trade. There was no mention by Trump if he will end his threat to slap tariffs on Japanese auto imports as part of the trade deal.

“My administration looks forward to continued collaboration with the Congress on further negotiations with Japan to achieve a comprehensive trade agreement that results in more fair and reciprocal trade between the United States and Japan,” Trump said in the statement released by the White House via email. – Bloomberg News.

The Dow Jones Industrial Average declined 0.52% to 27,076.82 and the Nasdaq Composite Index slid 0.28% to 8,153.54.

 

EUROPE

The European Central Bank (ECB) has the scope to buy bonds as part of its monetary stimulus for quite a while before hitting self-imposed limits, according to its chief economist, Philip Lane.

The Executive Board member who proposed the decision unveiled last week (ended 13 September) signalled on Monday (16 September) that there is no imminent danger of reaching buffers previously set by officials to ensure quantitative easing (QE) cannot resemble monetary financing.

“Based on our projections on the size and evolution of the purchasable universe, we are confident that the envisaged purchase volumes will be consistent with the current parameters of the asset purchase programme for an extended period of time,” Lane said at an event at Bloomberg’s European headquarters in London.

Lane’s remarks elaborate on comments by ECB chief Mario Draghi, who said on Thursday that the Governing Council did not need to discuss the possibility of raising those limits on bond purchases because “we have relevant headroom to go on for quite a long time”. The president previously claimed that the institution can adjust its buffers if warranted by the economic situation it faces.

The ECB’s rules state that it can buy no more than 33% of bonds from a single government issuer. Its purchases also need to reflect the share each country has in its capital, making member states such as Germany and France the two biggest beneficiaries of monthly purchases.

The ECB pledged to buy bonds at a pace of EUR20b (USD22b) a month for as long as necessary as part of a stimulus package that included an interest-rate cut to an all-time low of -0.5%. Policymakers including the governors of central banks in France, Germany, and the Netherlands were all against the move to restart QE.

On expectations for the effects of last week’s stimulus package, Lane said he is “not going to disagree” with the estimate that the actions should lift inflation by 20 or 30 bps. “That order sounds OK to me,” he said. – Bloomberg News.

The Stoxx Europe 600 Index fell 0.58% to 389.53 on Monday.

 

JAPAN

The Bank of Japan (BOJ) will leave monetary policy unchanged this week (ending 20 September) as easing trade tensions and calmer financial markets relieve some of the pressure to act, according to a Bloomberg survey.

About three quarters of 48 economists said the BOJ will leave policy unchanged at the end of a two-day meeting Thursday (19 September), hours after the Federal Reserve is forecast to cut interest rates. The European Central Bank last week cut rates and revived bond purchases, part of a global policy shift that has raised expectations the BOJ will follow suit.

Still, nearly half of analysts surveyed said the BOJ would add monetary stimulus in some form either this week or at its meeting in October, with the number evenly divided on the timing at 23% each.

A strong and growing majority of BOJ watchers – 83% in the latest survey – now see additional stimulus as the BOJ’s next policy step, though they have different opinions on what forms it would take, and even whether certain moves would amount to stimulus.

About a third of those surveyed said the BOJ would strengthen its pledge to keep interest rates extremely low this week, while 21% said it would widen the targeted trading range for the 10-year yield on Japanese government bonds.

Governor Haruhiko Kuroda said following the last policy meeting in July that the BOJ has become “more positive” about adding stimulus, reinforcing market expectations for action.

The BOJ has plenty of reasons to be ready. While tensions have eased lately, the US-China trade war looks likely to keep weighing on Japan’s exports, as does a slowdown in the global economy. A sales-tax hike due to take effect in Japan next month raises concerns about domestic consumption.

Risks from the trade war and global economy were cited by 40% of analysts as the BOJ’s biggest worry, with 21% pointing to a strong yen, and 19% saying the policy actions of other central banks. – Bloomberg News.

The Nikkei 225 Index was 0.24% lower at 21,934.49 early-Tuesday (17 September) morning. The benchmark was closed Monday for a holiday.

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