Sunday 22 July 2018

Daily Market Update: Obama scuppers Pfizer-Allergan mega-merger

Christine Lagarde, Managing Director of the International Monetary Fund
Christine Lagarde, Managing Director of the International Monetary Fund

Richard Ramsey

Risk appetite has waned over the last 24 hours as concerns over global economic growth mount.

The IMF’s managing director Christine Lagarde set the tone in a speech yesterday morning. According to Ms Lagarde global growth “remains too slow, too fragile and risks to its durability are increasing”. Furthermore, the threat of a “new mediocre” of weak economic progress had risen. Ms Lagarde’s comments yesterday are seen to be paving the way for a downgrade in the IMF’s global growth forecasts due next week. The IMF is increasingly pessimistic about the prospects of emerging economies alongside the potential for new shocks from China, Russia or Brazil.

Risk sentiment changing

Christine Lagarde’s comments yesterday triggered an about turn in risk sentiment with European and US stock markets posting sizeable losses. The Euro Stoxx index closed 2.4% lower with Wall Street’s S&P 500 ended yesterday’s session 1% lower. Overnight in Asia, the Japanese Nikkei 225 index fell for the seventh day in a row, its longest losing streak since Prime Minister Shinzo Abe took power in late 2012. Japanese exporters are struggling with the strengthening of the Japanese yen. The latter strengthened to an 18-month high against the dollar yesterday with the yen a traditional safe haven currency when investor sentiment takes a knock. On the bond markets, US, UK and German sovereign debt yields (which move inversely to price) all fell with the benchmark 10-yr German Bund easing to 0.1%. This represented its lowest level in a year.

German economic growth continues

Financial markets also had their fair share of disappointing economic data to digest. Yesterday’s Eurozone services and composite PMIs came in weaker than the earlier flash estimates had suggested. These both came in at 53.1 for March. German economic growth continues to hold up well but growth appears to have stagnated in France. The French composite PMI came in at 50.0 last month and has remained around or below this level for the last 4 months. A strengthening euro will not help the French economy recover. Looking at the Eurozone composite PMI on a quarterly basis, it is noted that Q1’s reading (53.1) represented the weakest quarter since Q4 2014. The one positive from yesterday’s Eurozone economic data was the continued growth in retail sales. Eurozone retail sales had been expected to remain flat in February but instead posted a 0.2% m/m gain. We get a more timely indicator of consumer sentiment with the Eurozone retail PMI for March due this morning.

US news

Yesterday’s US incoming economic data was somewhat mixed. The US trade deficit widened in February by more than expected to $47.1bn. However, the ISM non-manufacturing survey exceeded expectations. The pace of activity accelerated from 53.4 in February to 54.5 for March – a three-month high. Meanwhile the big piece of US news over the last 24 hours is the White House tax crackdown. President Obama yesterday came out strongly against tax inversion deals whereby companies move to low tax jurisdictions. According to Obama this is “one of the most insidious tax loopholes out there”. This morning it is being reported that the White House proposals to close certain tax loopholes has scuppered the proposed $160bn merger between Pfizer and Allergan. The latter is domiciled in Dublin.

Concerns in China

Concerns over the Chinese economy have been a source of pessimism in recent months. However, the latest services PMI for China, the Caixin one as opposed to the state sponsored version, rose to 52.2 last month, up from 51.2 in February. Meanwhile the composite PMI, which combines manufacturing and services moved back above the expansion threshold (50.0) to 51.3. This represented the strongest rate of growth since April last year. Closer to home, the UK services PMI, released yesterday, rebounded in March following February’s marked slowdown. However, the March figure of 53.7 still represents a rather lacklustre rate of growth. Looking to today’s releases, the key focus of attention will be the latest FOMC minutes. On the currency markets the euro continues to strengthen against sterling. EUR/GBP touched 80.5p yesterday and is just below 80.4p as I write. EUR/USD has moved in the other direction having touched $1.14 late yesterday afternoon it is currently changing hands at $1.135.

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