June 19, 2018
United States:
U.S. Stocks Slip as OPEC Outlook Supports Crude: Markets Wrap
The S&P 500 slipped following stock declines in Europe and Asia amid concern over the escalating protectionist standoff between China and the U.S. Oil gained before a key OPEC meeting this week. U.S. equity gauges came off their lows of the day as energy shares advanced along with software makers. The Stoxx Europe 600 Index posted its biggest two-day drop since March and Japan’s Topix Index fell the most in almost three weeks. Crude climbed as producers were discussed a smaller-than-expected boost to production. Treasury yields were little changed after trading near the lowest level this month. Global trade is firmly back at the top of the agenda, with investors fretting about the intensifying confrontation between the U.S. and China. The Asian nation swiftly responded after President Donald Trump slapped tariffs on $50 billion of imports late last week, putting an additional 25 percent levy on $34 billion of American agricultural and auto exports starting July 6. “The relative policy calm was shattered late in the week as trade tensions escalated,” David Joy, the chief market strategist at Ameriprise Financial Inc., said in a note. “There is still time for negotiation. But the inexorable march toward a trade war with China took a significant step forward.” Meanwhile in Europe, German Chancellor Angela Merkel and British Prime Minister Theresa May face tough weeks over migration and Brexit, respectively. Trump said in a tweet that the German people “are turning against their leadership as migration is rocking the already tenuous Berlin coalition.” An index of emerging-market currencies fell for a fifth day, leaving it on track for the biggest quarterly decline since September 2015. Developing-nation equities extended a drop after their worst weekly performance in a month, with an MSCI index retreating for a fourth day.
Europe:
BOE August Rate Increase in Question as U.K. Economy Falters
Economists are increasingly questioning whether the Bank of England will raise interest rates in the coming months. Less than 55 percent of analysts surveyed by Bloomberg expect a hike in August, down from 60 percent in a similar poll in May. BOE officials are gathering this week for their June policy meeting, the minutes of which have the potential to lay the ground work for an increase later in the summer to 0.75 percent from 0.5 percent. Economists are increasingly questioning whether the Bank of England will raise interest rates in the coming months. Less than 55 percent of analysts surveyed by Bloomberg expect a hike in August, down from 60 percent in a similar poll in May. BOE officials are gathering this week for their June policy meeting, the minutes of which have the potential to lay the ground work for an increase later in the summer to 0.75 percent from 0.5 percent. Bets on an August interest-rate increase from the BOE are still about 50/50.“The minutes are likely to allude to intensifying political risks associated with Brexit negotiations,” Goldman Sachs economist Adrian Paul said in a note published on Monday. “We expect the Committee to remain equivocal over the precise timing of incremental tightening.” The uncertainty created by negotiations for the U.K. to leave the European Union is muddying the path away from extraordinary stimulus for the BOE. Since their last meeting in May, global growth has moderated and the anticipated British rebound from a snow-blighted first quarter has been slow to assert itself. Economists’ less-than-fulsome endorsement of an August hike is also reflected in markets, where investors assign about a 50 percent chance to such a move. It also contrasts with their exuberance earlier this year, when almost three-quarters were expecting a hike in May less than a month before that decision. Those bets were derailed by a spate of worse-than-expected data and the public doubts of BOE governor Mark Carney. Since then, policy makers have expressed optimism that the economy is bouncing back from a near-stagnation at the start of the year. They also say limited and gradual rate hikes are still required over the next few years to keep inflation in check, partly because the economy’s “speed limit” has fallen.
Banks in Denmark Are Granting Risky Mortgages, Supervisor Warns
Denmark’s Financial Supervisory Authority says that banks are granting risky mortgages to some apartment buyers, after surveying lending practices at six large and medium-sized financial institutions. The Copenhagen-based FSA said in a statement on its website that competition in Denmark’s bigger cities is driving banks to make the loans, which put both clients and themselves at risk if prices fall in the future. Lenders aren’t doing sufficient checks on prices, the FSA said.
Asia:
China Vows to Retaliate as Trump Targets $200 Billion in Tariffs
Trade tensions between the world’s two biggest economies intensified, with China vowing to retaliate “forcefully” against President Donald Trump’s threatened tariffs on another $200 billion in Chinese imports. “If the U.S. loses its senses and publishes such a list, China will have to take comprehensive quantitative and qualitative measures,” according to a statement from the Ministry of Commerce. It labeled the move “extreme pressure and blackmail,” and said it would retaliate with counter measures. Trump ordered up identification of $200 billion in Chinese imports for additional tariffs of 10 percent — with another $200 billion after that if Beijing retaliates. While the $50 billion in tariffs already announced on Friday were mainly on industrial goods, the broader move would push up prices for toys, tools, t-shirts and a lot more for U.S. shoppers. Markets soured as economists warned of damaged business confidence, a blow to China’s growth prospects and ripple effects through its supply chains. The benchmark index of Chinese stocks fell almost 4 percent, other Asian share markets declined and U.S. equity futures traded lower, while safe havens including the yen, gold and Treasuries climbed. “Its psychological effects, its effects in increasing uncertainty, could be very serious and we’re certainly getting later in a cycle of escalation,” former U.S. Treasury Secretary Lawrence Summers said in an interview on Bloomberg Television. By targeting goods that are finished in China but whose components are often sourced from neighboring South Korea, Japan and Taiwan and more, the U.S. strategy could hurt the economies of America’s allies too. “The collateral damage from an escalating U.S.-China trade war will be widespread, hitting many Asian countries that are part of China’s manufacturing supply chain in sectors such as electrical and electronic products,” said Rajiv Biswas, Asia Pacific chief economist at IHS Markit in Singapore. There are dangers for the U.S. economy too. If implemented, the tariffs would mean a sizable amount of imported Chinese goods would be exposed to new tariffs. Higher prices on imported goods could dampen consumer sentiment and pressure inflation.