US stocks fall as China trade meeting looms


All eyes on highly anticipated trade talks
Chief Investment Office08 Oct 2019
Photo credit: AFP Photo


US

US equities declined as investors tried to gauge the outlook for a trade deal between China and the Trump administration. Treasuries slipped and the dollar gained.

The S&P 500 Index ended the day about 0.5%pts lower after bouncing between small gains and small losses in light volume. Sentiment got a boost on speculation that China is ready to do a deal, while pessimists focused on a report that senior Chinese officials have indicated the range of topics they are willing to discuss at upcoming talks has narrowed considerably. After the close of New York markets, the US placed eight Chinese technology companies on a blacklist because of alleged human-rights violations, a move that may add to tensions between the countries.

In the wake of a slew of weak data and with protectionism portrayed as the main impediment to global growth, investor focus will return to foreign trade this week (ending 11 October) as Chinese Vice Premier Liu He and an entourage of officials head to Washington to resume talks with their US counterparts. As economic indicators flash warnings, traders have ramped up bets for further Federal Reserve rate cuts. They will search for new clues on the policy path when minutes from the latest Fed meeting are released in coming days. – Bloomberg News.

The S&P 500 tumbled 0.45% to 2,938.79 on Monday (7 October). The Dow Jones Industrial Average erased 0.36% to 26,478.02 and the Nasdaq Composite Index slipped 0.33% to 7,956.29.

 

EUROPE

World Bank President David Malpass said the global economic outlook is deteriorating amid Brexit-related uncertainty, trade tensions, and a downturn in Europe.

Malpass renewed his global growth warning as investors are keeping an eye on several major issues that could come to a head this month. Economic indicators from Europe are flashing red as a slump in manufacturing increasingly affects domestic demand. Malpass repeated his criticism of the roughly USD15t of bonds with zero or negative yields, describing it as “frozen capital” that is diverting resources from growth and benefiting bondholders and issuers of the debt.

Meanwhile, Europe’s troubles intensified on Monday, with German industry suffering a fresh blow and investors turning gloomier about the region’s economy. German factory orders fell 0.6% in August, twice as much as forecast by economists. While the number can be volatile, it means demand has now fallen on a year-on-year basis for 15 straight months.

The decline is just the latest in a string of negative news that is driving increased pessimism about the Euro Area. In a separate report, Sentix said its gauge for the region fell to a six-year low this month, and investors downgraded their view to “recession” from “downturn”. The expansion of recession concerns to the broader Euro Area shows the mounting distress about Europe’s prospects. It also adds to evidence that investors may be losing faith in the European Central Bank’s ability to boost growth after it announced new monetary stimulus in September.

The gloom about Europe continues to drive demand for the safety of German bonds, where 10-year yields fell back to -0.6% on Monday. Much of the weakness is centred on Germany, which probably slipped into a technical recession in the last quarter. A manufacturing slump that initially looked like a temporary issue has proved more long-lasting, and prospects remain uncertain amid increased risks of a no-deal Brexit and an intensifying trade war.

Business expectations in Germany fell to the lowest in a decade in September, with the mood among factory executives cited as the main reason. Sentix’s German Index is also at the weakest in 10 years, and industrial production figures on Tuesday are forecast to show a third straight decline. –Bloomberg News.

The Stoxx Europe 600 Index rose 0.71% to 382.91 on Monday as foodmaker and telecommunication companies advanced.

 

JAPAN

The US and Japan signed a limited trade deal intended to boost markets for American farmers and give Tokyo assurances, for now, that US President Donald Trump would not impose tariffs on auto imports.

The accords on agriculture and digital trade cover about USD55b worth of commerce between the world’s largest- and third-biggest economies, US Trade Representative Robert Lighthizer said at a ceremony in the Oval Office alongside Trump. The goal is for the accord to take effect 1 January.

Under the deal, Japan will lower or reduce tariffs on some USD7.2b of American-grown farming products, including beef and pork.

Japan Prime Minister Shinzo Abe’s priority was to win a pledge that the US would not slap tariffs on Japanese automobile exports, a sector valued at about USD50b a year and a cornerstone of the country’s economy.

The written text of the deal does not explicitly cover auto tariffs, but Abe has said he received assurances that Japan would be spared from them.

The proposed pact would not lower the barriers protecting Japan’s rice farmers – a powerful group supporting Abe’s ruling Liberal Democratic Party. This could help the prime minster smooth the deal’s course through parliament, where it must be ratified before coming into effect.

Trump, who faces re-election next year, was eager to make a deal with Japan to appease US farmers who have been largely shut out of the Chinese market as a result of his trade war with Beijing. American agricultural producers, also reeling from bad weather and low commodity prices, are a core component of Trump’s political base.

The US has said this agreement – which was signed in principle on the sidelines of the United Nations General Assembly last month – is just the first phase of a broader agreement. – Bloomberg News.

The Nikkei 225 Index rose 0.64% to 21,513.05 on Tuesday (8 October) morning, reversing the previous session’s 0.16% loss to 21,375.25.

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