Each word of Trump's tariff tweets wiped USD13b off stocks


Not only did they spark losses, but volatility came roaring back with a vengeance
Chief Investment Office09 May 2019
Photo credit: AFP Photo


US

It was a total of 102 words that erased about USD1.36t from global stocks this week (ending 10 May).

Equity markets across the world were roiled by US President Donald Trump’s tweets Sunday (5 May) that he would boost tariffs on Chinese goods. Not only did they spark losses, but volatility came roaring back with a vengeance, with the CBOE Volatility Index rising 50% in two days to breach 20 for the first time since January.

Risks surrounding US-China trade relations – which were not on investors’ radar as late as last week – came flooding back. Markets had been lulled into a state of complacency in recent weeks as confidence grew – the trade discussions were going well, major central banks were dovish, and US corporate earnings were coming in better than expected.

Depending on who you talk to, the events of the last two days are only a speed bump that gave back a fraction of this year’s market rally or have raised a valid question of whether the bull market can continue.

Given the slump in shares, it is clear some investors are repositioning. Furthermore, the dovish central bank pivot means it is a different market now than last year when both the US and China were tightening policy, according to an asset manager in Hong Kong.

Everything now depends on what happens today (9 May) and Friday when negotiations between two of the world’s largest economies meet in Washington.

US stocks fell for a third day on Wednesday as an escalation in trade tensions prompted investors to question whether China and America will make progress on talks this week. The S&P 500 swung between gains and losses for much of the day as markets sought a measure of calm after the White House suggested a deal was still possible even as both sides threatened to raise tariffs as soon as Friday. Stocks had swooned 2% to start the week as trade tensions escalated. A late drop in Intel Corporation helped to weigh on tech shares.

The S&P 500 Index fell 0.16% to 2,879.42, the Nasdaq Composite Index dropped 0.26% to 7,943.32, and the Dow Jones Industrial Average added 0.01% to 25,967.33. – Bloomberg News.

 

EUROPE

Top-performing companies in Europe have become more and more profitable over the last few decades, widening the gap with the rest of the market, according to Bloomberg Economics (BE).

Looking at returns, BE’s analysis shows a shift in the distribution across countries, though leading firms have been more successful in Sweden and the UK, and to a lesser extent Germany and France.

Rather than a sign of weakening competition, the skew in profitability appears to favour sectors and firms throughout the region that are more digitised and capital light.

Meanwhile, Mario Draghi defended the European Central Bank’s (ECB) inflation goal and said he sees increasing wage pressure that will help the institution meet its mandate. People say “it’s been so long when we haven’t reached the below but close to 2%, why don’t you lower inflation to something lower and accept defeat,” the ECB president told students in Frankfurt. “And that’s exactly why we are not doing it, because we don’t accept defeat.”

As Draghi nears the end of his eight-year term and contenders to replace him line up, a debate has broken out over whether the central bank’s strategy for achieving price stability is appropriate. Policymakers aim to keep price growth just under 2% over the medium term but have fallen far short of that for years despite trillions of euros of stimulus. – Bloomberg News.

The Stoxx Europe 600 Index rose 0.15% to 382.23, giving investors some respite after the US said China wanted to make a deal.

 

JAPAN

Toyota Motor Corporation and Honda Motor Company Ltd forecast profit and sales short of analysts’ estimates as a trade spat between the US and China threatens global car sales already sputtering from weaker demand.

Both reported results on Wednesday (8 May) that underscore the challenges faced by automakers across the globe, from having to invest in electrification and self-driving cars, to struggles with tariffs on both sides of the Pacific Ocean and changing consumer tastes.

Honda and Toyota’s results come two weeks after Nissan Motor Company said it was set to miss its full-year profit goal. The Japanese carmaker, which has been struggling to reignite earnings and sales while dealing with the fallout from the arrest of ex-chairman Carlos Ghosn, slashed its operating profit forecast for the year ended March for the second time. Nissan will report final results on 14 May.

Although Toyota became the first publicly traded Japanese company to report annual sales of more than JPY30t (USD272b) and unveiled plans to buy back as much as JPY300b of its shares, the stock failed to erase losses and closed down about 1% in Tokyo trading. Honda reported after the market close. – Bloomberg News.

The Nikkei 225 Index slipped 0.45% to 21,500.51 in early-Thursday trading, adding to a two-day decline. It fell 1.46% to 21,602.59 on Wednesday.

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