Friday 13 December 2019

Daily Market Update: Global equity markets tumble & US manufacturing contracts at its fastest pace in 6 -1/2 years

Philips New Years Eve Ball in New York City. (Photo by Neilson Barnard/Getty Images)
Philips New Years Eve Ball in New York City. (Photo by Neilson Barnard/Getty Images)

Richard Ramsey

Global equity markets were centre stage yesterday with steep falls recorded across the board.

The 7% drop in Chinese equities set the tone for Europe and the US. In Europe the German Dax exchange posted a hefty 4.3% decline with the wider Eurozone Euro Stoxx index closing over 3% lower. Wall Street fared relatively better with the S&P 500 ending yesterday’s session 1.5% lower. Following yesterday’s $590bn selloff in Chinese equities, which equates to the GDP of Sweden or Thailand, the Chinese authorities have intervened this morning to prop up its stock market. State-controlled funds have bought equities and the securities regulator has signalled that the selling ban for major investors will now extend beyond this week’s expiry date. As a result, the Shanghai Composite closed just 0.3% lower this morning. Overall, Asian stocks experienced their worst start to a year since 1988 yesterday.

This morning Japan’s Nikkei 225 index closed a modest 0.4% lower. Meanwhile European stocks are back in positive territory.One Federal Reserve policymaker, San Francisco Reserve President John Williams, remains unconcerned by the latest news from China. Speaking yesterday Williams said "in terms of those developments ricocheting into the U.S. economy, I think we have really strong fundamentals, in terms of consumer spending, in terms of our economic trajectory, so right now at least this isn't a big concern for me."

Williams is one of the few Fed officials who regularly visits China for a first-hand look at the world's second-largest economy. "The Chinese stock market affects a relatively small share of Chinese citizens. It doesn't affect the U.S. financial system that much directly so to me those are not major concerns in terms of systemic risk right now," Williams said. The San Francisco Fed President still expects three to five US interest rate hikes this year given the strength of the US economy. Meanwhile Fed colleague, Loretta Mester who is President of the Cleveland Fed, also shrugged off concerns over China and said the “underlying fundamentals of the US economy remain very sound”.

While Mester and Williams remain unconcerned there are signs that the US economy has not been growing as fast as previously thought. Economists have been slashing their estimates for Q4 economic growth. This follows weak readings for manufacturing and construction activity yesterday. The US ISM manufacturing survey disappointed market expectations as flagged in yesterday’s commentary. US manufacturing activity contracted for the second consecutive month in December with the pace of decline accelerating from 48.6 in November to 48.2 last month. The latter represented the weakest reading in 6½ years.

Meanwhile the employment component is at its lowest level in over 6 years. Manufacturing exports was one of a few indices to record growth in December. The concern amongst policymakers will be whether the industrial recession spreads to the wider US economy. We will get an indication of this tomorrow with the ISM nonmanufacturing (i.e. services & construction) tomorrow. The Federal Reserve Bank of Atlanta yesterday downgraded its Q4 growth estimate (on an annualised basis) from 1.3% to 0.7%. JP Morgan Chase cut its estimate in half from 2% to 1%.

The US manufacturing PMI followed a disappointing survey from the UK. The pace of UK manufacturing activity slipped to a 3-month low of 51.9 in December, down from 52.5 the previous month. The slowdown in UK manufacturing was evident across a range of indicators with the rate of growth in output, new orders & exports easing last month. Employment was one of the few indicators to post an improvement last month relative to November. Meanwhile the latest lending figures from the Bank of England revealed that the UK private sector is borrowing more again. Borrowing by households increased by 3.2% y/y and by non-financial companies it was up 1.4% y/y in November. While this may not sound like much, for non-financial companies at least it represents the fastest rate of y/y borrowing growth since early 2009. Mortgage balances increased by 3.5% y/y and borrowing on cards, personal loans and overdrafts was up 8.3% y/y. Interest rates are set to remain "low for long" to borrow Mark Carney's phrase. However, household debt to income is still quite high. If debt growth picks up further, "lower" may go on for even "longer" than financial markets currently expect.

Despite the current tensions in the Middle-East the oil price has actually moved lower over the last 24 hours. A barrel of Brent crude is back at $37 this morning down from $38 yesterday. This highlights the amount of inventory and glut in the oil supply. Elsewhere in the currency markets risk aversion has benefitted the dollar. EUR/USD is down one cent over the last 24 hours and is changing hands at $1.079 as I write. Cable is down slightly at $1.47 which compares with $1.473 at yesterday’s European open. Meanwhile the move in EUR/USD has also helped drive EUR/GBP down from 74p yesterday to 73.4p today.

Looking at the day ahead the key release in Europe is the Eurozone’s CPI figures. The market consensus is for a marginal improvement in the annual rate from 0.2% in November to 0.3% for December. However, after yesterday’s weaker than expected readings from Germany it looks likely that today’s print will disappoint expectations. Elsewhere there is a lack of top tier economic data. economic In the UK we have the construction PMI with the New York PMI (all sectors) due this afternoon in the US.

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