Thursday, 23 May 2019

Trade woes sink shares, Brexit weighs on sterling

LONDON (Reuters) - World shares made it four days in the red in the last five on Thursday as concerns grew that the China-U.S. trade conflict was fast turning into a technology cold war between the world’s two largest economies.

Asian stocks caved to a four-month low as the rhetoric between Beijing and Washington remained fierce while Europe’s bourses also fell as Brexit worries and gloomy data from Germany and the euro zone added to the nerves.

U.S. stock futures also pointed to a weak start with the S&P 500 e-minis faltering 0.5%.

Investors worry that the U.S.-China trade dispute, which has already hurt global growth and business investment, could see a further sharp escalation with no signs of a resolution as yet.

Late Wednesday, Reuters reported the U.S. administration was considering Huawei-like sanctions on Chinese video surveillance firm Hikvision over the country’s treatment of its Uighur Muslim minority, according to a person briefed on the matter.

After the United States placed Huawei Technologies on a trade blacklist last week, British chip designer ARM has halted relations with Huawei in order to comply with the blockade.

Digging the knife in, the U.S. military said it sent two Navy ships through the Taiwan Strait on Wednesday.

“It’s tin hats on and battening down the hatches for a fair bit of volatility for the next few months,” said Tony Cousins, Chief Executive of Pyrford International, the global equities arm of BMO Global Asset Management.

“We are as defensively positioned as we could be,” he said, adding it was impossible to predict what steps U.S. President Donald Trump was likely to take next in the trade war with China.

An increasing number of investors now seem to be hunkering down for prolonged period of trade conflict.

Analysts at Nomura warned in a note, “Without a clear way forward during an intensifying 2020 U.S. presidential election, we see a rising risk that tariffs will remain in effect through end 2020.”

In response, Shanghai blue chips shed 1.7% to be near their lowest since February. An index of major telecoms firms fell 3.7% as suppliers to Huawei suffered. MSCI’s broadest index of Asia-Pacific shares outside Japan touched its lowest in four months.

Treasury Secretary Steven Mnuchin said on Wednesday it would be at least a month before the United States would enact proposed tariffs on $300 billion in Chinese imports as it studies the impact on American consumers.

The Indian market bucked the global picture Prime Minister Narendra Modi’s party scored a historic victory in the nation’s general election with official data showing Modi’s Bharatiya Janata Party (BJP) ahead in 292 of the 542 seats available.

At least 272 seats are needed for a majority in the lower house of parliament.

In currencies, constant trade friction saw the safe haven yen in demand again as the dollar dipped to 110.16 yen and away from the week’s top of 110.67.

The dollar was up fractionally on the euro at $1.1130 and touched a 1-month high on a basket of currencies at 98.235.

Minutes of the U.S. Federal Reserve’s last meeting out on Wednesday underlined its readiness to be patient on policy “for some time” given the uncertain global outlook.

The chance of a rate cut seemed to diminish as many Fed policy makers saw recent weakness in inflation as “transitory”, though the latest escalation in the trade war means markets are still wagering on an eventual easing.

Sterling had troubles of its own as it hit a 4-1/2-month low of $1.2603 as it suffered its ninth drop in the last 10 days.

British Prime Minister Theresa May came under intense pressure after her latest Brexit gambit backfired and fueled calls for her to quit.

Prominent Brexit supporter Andrea Leadsom resigned from the government on Wednesday and with British media reporting May could announce her departure date as early as Friday the bets on a more hard Brexit replacement are rising.

“Uncertainty is the only clear certainty in the near term,” said Westpac macro strategist Tim Riddell.

“The risk of a hard-Brexit replacement for May has increased the risks of a hard Brexit result or even a forced no-deal exit,” he added. “Such an event would likely force GBP lower, increase risks of assets sliding and BOE (Bank of England) taking counter action to support assets.”

In commodity markets, spot gold was a bit higher at $1,274.73 per ounce.

Oil prices added to losses suffered overnight after an unexpected build in U.S. crude inventories compounded investor worries about demand.

U.S. crude was last down 48 cents at $60.94 a barrel, while Brent crude futures lost 57 cents to $70.41.

Reporting by Wayne Cole and Marc Jones

Bears dig in on Asian currencies as trade war reignites

(Reuters) - Investors bet most Asian currencies will come under further pressure, a Reuters poll showed, with trade tensions between the United States and China firmly dominating headlines once again.

With diminishing hopes of a long-awaited trade deal between the world’s top two economies, the mood across markets have been apprehensive with investors shifting money to safer bets.

Investors, who were bullish on China’s yuan for much of this year until April end, have since raised their short positions to their highest in six months, the poll of 12 respondents showed.

Trade tensions have taken a toll on the Chinese economy, but measures promised by Beijing, including massive stimulus, have started to filter through. However, with tensions escalating again, the yuan has lost about 2.5% since U.S. President Donald Trump said on May 5 he was going to raise tariffs on $200 billion of Chinese imports.

Trade reliant economies, such as Taiwan and South Korea, are among the most exposed to a deterioration in trade relations.

The poll showed market participants raise their short positions on both country’s currencies over the last two weeks with bets on South Korea’s won at their highest in more than a decade, with a slew of weak domestic data adding to the unit’s woes.

It is the region’s worst performing currency, shedding over 6% against the dollar so far this year. A state-run think tank on Wednesday called on monetary policy in the country to be substantially accommodative.

Short bets on Taiwan’s dollar climbed to their highest since January 2016.

In India, the seven-phase general election process that lasted for more than a month culminates on Thursday with vote-counting set to show whether Prime Minister Narendra Modi will win a second straight term. Exit polls have predicted a clear win for Modi, and markets have cheered them.

Long positions on the Indian rupee were marginally higher from two weeks ago. The unit is just one of two currencies in the green this year among its peers covered in this poll.

Investors turned bullish on the rupee in March for the first time in nearly a year, after Modi turned the campaign into a fight about national security, shifting the narrative away from criticism he faced on weak job growth and farm prices that saw the opposition build momentum.

Elsewhere, market participants flipped their bets on the Philippine peso, with short positions now at their highest since December last year.

Uncertainty over the political future of Thailand and Indonesia has clouded outlook due to recent disputed elections.

Accordingly, investors raised bearish bets on Thailand’s baht and Indonesia’s rupiah to their highest since November.

Protests have engulfed central Jakarta, Indonesia’s capital city, this week while the Thai central bank cautioned that the economy faces potential hazards from political uncertainty.

The Asian currency positioning poll is focused on what analysts and fund managers believe are the current market positions in nine Asian emerging market currencies: the Chinese yuan, South Korean won, Singapore dollar, Indonesian rupiah, Taiwan dollar, Indian rupee, Philippine peso, Malaysian ringgit and the Thai baht.

The poll uses estimates of net long or short positions on a scale of minus 3 to plus 3. A score of plus 3 indicates the market is significantly long U.S. dollars.

Reporting by Nikhil Kurian Nainan

Wednesday, 22 May 2019

European shares dip as trade war fears weigh

(Reuters) - European shares edged lower on Wednesday as concerns over a protracted U.S.-China trade war again worried investors, while a drop in the pound propped up London’s blue-chip index.

The pan-European STOXX 600 index was down 0.1% by 0708 GMT with Germany’s DAX, traditionally sensitive to trade issues, down 0.2%.

A report that the United States is considering limits on Chinese video surveillance firm Hikvision added to the list of tensions between the two sides ahead of a summit later this month.

The STOXX 600 is down about 3% so far this month, on course for its first monthly decline this year as the tensions threaten to hurt global growth.

Auto shares slipped 0.4% and basic-resources stocks, among those first in the firing line, retreated 0.3%.

Britain’s exporter-heavy FTSE 100, however, outperformed its peers and rose 0.4%, bolstered by Brexit-driven falls in the pound, which boost the foreign revenues of its internationally-focussed firms.

Marks & Spencer shares dropped more than 5% after the retailer reported its third straight decline in full-year profit, showing the pain of its latest attempt at a multi-year turnaround.

Shares of asset manager Intermediate Capital Group jumped to the top of STOXX 600 after posting full-year results.

Reporting by Medha Singh and Agamoni Ghosh

Fed may cut rates if inflation keeps disappointing

HONG KONG (Reuters) - Further weakness in inflation could prompt the U.S. Federal Reserve to cut interest rates, even if economic growth maintains its momentum, James Bullard, President of the Federal Reserve Bank of St. Louis, said on Wednesday.

The risk of the Fed missing its 2% inflation target and the trade war were two key macroeconomic challenges to the policy-setting Federal Open Market Committee (FOMC), he said in a presentation prepared for an audience at the Foreign Correspondents’ Club (FCC) in Hong Kong.

The Fed held interest rates steady earlier in May, when Chairman Jerome Powell said there was “no strong case” for either a cut or hike in interest rates.

But Bullard said on Wednesday “a downward policy rate adjustment even with relatively good real economic performance may help maintain the credibility of the FOMC’s inflation target going forward.”

“A policy rate move of this sort may become a more attractive option if inflation data continue to disappoint,” he said.

Bullard and Chicago Fed’s Charles Evans, both voting members of the FOMC, have in recent days expressed concerns over the Fed’s failure to meet its target. Bullard said on Wednesday that another ‘low-side miss’ is on the horizon in 2019.

Bullard said any policy adjustment going forward would be in response to incoming data, and not a continuation of the rate normalisation process which has stopped earlier this year after 225 basis points worth of hikes from near zero levels.

He remained upbeat about growth prospects.

Bullard drew comparisons with 2-1/2 decades ago — when rates were increased by 300 basis points between early 1994 and early 1995, and the economy still boomed during the second half of the 1990s — to stress that rate normalisation can be accomplished without damaging prospects for an extended period of growth.

The next FOMC meeting will convene on June 18.

Bullard expects agreements on trade will be reached in the near term, but warned that a failure to do so, with substantial barriers “erected and maintained,” could alter “global trading patterns over the medium term”.

These unresolved trade disputes and the below-target inflation “suggest that the FOMC needs to tread carefully in order to help sustain the economic expansion,” he said.

Bullard said that from a macroeconomic perspective, China should agree to “everything that’s being asked” in the negotiations because it would lead to a domestic economic boom.

“They will establish credibility on trade inside China, and will reassure foreign investors that they can invest in China and be treated appropriately. If that occurs, I would see blue skies ahead for the Chinese economy,” Bullard said.

“It’s not just the U.S. that’s doubting Chinese credibility. Many global players all around the world have found that it’s a difficult place to do business.”

In an interview with Bloomberg TV earlier on Wednesday, Bullard said tariffs would have to stay on for “something like six months” with no prospect of a resolution in sight to weigh on Fed policy.

In his FCC remarks, he added China selling its large stock of U.S. Treasuries was not “as big of a threat as it’s being made out to be” as it would be hard to replace them with other assets.

Reference: Noah Sin, Marius Zahari

Tuesday, 21 May 2019

Asian stocks off four-month lows, but Huawei row weighs

TOKYO (Reuters) - Asian shares won some respite on Tuesday after Washington temporarily eased trade restrictions imposed last week on China’s Huawei, although fears of a further escalation in tensions kept investors on edge.

Financial spread-betters expect London’s FTSE Frankfurt’s DAX and Paris’s CAC to gain between 0.3% and 0.5% when they open.

MSCI’s broadest index of Asia-Pacific shares outside Japan was up by a marginal 0.1% but stayed not far from a four-month low touched on Friday.

It has fallen almost 8% from a nine-month peak hit just over a month ago. Japan’s Nikkei average retreated 0.3%.

China’s blue-chip CSI300 index jumped 1.4%, a day after it fell to a three-month intraday low as Washington allowed Huawei Technologies Co Ltd to purchase American-made goods in order to maintain existing networks and provide software updates to existing Huawei handsets until Aug. 19. The benchmark Shanghai Composite climbed 1.2%.

Still, an increasingly acrimonious atmosphere between the world’s two biggest economies has led investors to abandon any hopes of an early resolution, a sea change from just a few weeks ago when a deal was considered to be within reach.

“With the news around the U.S. and Huawei taking a turn for the worse, it seems that the trade war is increasingly showing signs of becoming a tech war,” said Seema Shah, senior global investment Strategist at Principal Global Investors in London.

“The further this trend develops, the bigger the collateral damage will be – particularly in Asia and the U.S., but the ripple effect will be significant across the globe.”

In New York, the S&P 500 lost 0.7% while the Nasdaq Composite dropped 1.5%. The Philadelphia Semiconductor Index fell 4.0% to two-month lows.

Huawei suppliers took a hit, with Qualcomm falling 6.0% and Micron Technology 4.0%.

“The determination of the U.S. administration to paralyze China’s aspirations to become a technology super power is clear when you consider that its actions against Huawei are not only damaging to China’s technology sector, but also the U.S. tech sector,” Shah said.

Some U.S. companies, such as Alphabet’s Google and Apple Face ID parts supplier Lumentum Holdings Inc, have already started to limit services to Huawei.

Following Washington’s Huawei ban, analysts suspect Beijing could take retaliatory measures against U.S. companies, further escalating tensions.

In addition to short-term economic disruptions, it could have huge repercussions for the global economy, said Cliff Tan, Head of East Asian research at MUFG Bank in Hong Kong.

“At a theoretical level, the Trump Doctrine means that in the context of national security, the U.S. government can seemingly go after anybody. That’s why in my gut I wondered, has Trump signaled the end of the global supply chain, for at least a few years?,” Tan said.

“I think trade diversion creates short-term winners and losers, but the overall impact on innovation may be negative for everyone,” he added.

Markets showed scant reaction to a speech by Federal Reserve Chairman Jerome Powell, who dismissed comparisons between the rise of business debt to record levels in recent years and the conditions in U.S. mortgage markets that preceded the 2007-to-2009 economic crisis.

In the foreign exchange market, major currencies were on the sidelines for now.

The euro was under pressure ahead of the European election this weekend but was little moved at $1.1158, off Monday’s low of $1.1150, its lowest since May 3.

The dollar was little changed at 110.18 yen, near Monday’s two-week high of 110.32 yen.

The British pound was listless near four-month lows, trading at $1.2723, just a stone’s throw from Friday’s low of $1.2714, as embattled UK Prime Minister Theresa May struggled to pull together a Brexit deal.

The yuan firmed slightly to 6.9030 to the dollar in onshore trade, still not far from a 5-1/2-month low of 6.9188.

The Australian dollar dipped 0.5% to $0.6877 after Australia’s central bank governor said he would consider the case for lower interest rates at its June policy meeting.

Oil prices held near multi-week highs as OPEC indicated it was likely to maintain production cuts while escalating Middle East tensions provided further support.

Brent crude futures traded up 0.3% at $72.20 per barrel while U.S. crude futures fetched $63.31 per barrel, up 0.3%.

Reference: Hideyuki Sano, Tomo Uetake

Monday, 20 May 2019

Stock markets slide as worries about Huawei fallout mount

LONDON (Reuters) - Stock markets weakened on Monday as concerns mounted about an escalating fallout from a U.S. crackdown on China’s Huawei Technologies.

Investors already on edge about an escalating U.S.-China trade dispute were further rattled after Beijing accused Washington of harboring “extravagant expectations” for a trade deal, underlining the gulf between the two sides.

Asian shares had managed to reverse some of last week’s losses on Monday after Washington said it would lift tariffs in North America, and as investors cheered apparent wins by Conservative incumbent parties in elections in Australia and India.

But the mood did not carry over to Europe, where weak corporate earnings added to the gloom.

The pan-European Euro STOXX 600 extended earlier losses and was down 1.06% by 1100 GMT - the index, down 3.5% in May, is on track for its first monthly loss in 2019.

The German DAX slid 1.38%, while France’s CAC 40 weakened 1.39%.

U.S. President Donald Trump’s government added Huawei to a trade blacklist last week, imposing restrictions that will make it difficult to do business with U.S. companies.

The repercussions quickly became evident as Google suspended some business with Huawei.

In Europe, chipmakers Infineon Technologies, AMS and STMicroelectronics dropped sharply, falling between 6% and 12% on growing fears of a disruption to the industry’s global supply chain.

“Market volatility continues to stem from announcements and interpretations of what is going on in trade disputes between the U.S. and its trading partners, but principally China,” said Jasper Lawler, head of research at London Capital Group.

“China are unlikely to take Google’s suspension of business with Huawei lying down.”

On the positive side, a U.S. decision on Friday to remove tariffs on Canadian steel and aluminum prompted Canada’s foreign minister to vow the quick ratification of a new North American trade agreement.

The MSCI index of world shares, which tracks shares in 47 countries, slipped 0.14%, leaving it 3.9% below its 2019 highs. The sudden return of trade war jitters has sent the stock market’s year-to-date rally into reverse.

U.S. S&P 500 e-mini futures dropped 0.51%.

Prominent investor Jim Rogers, who co-founded the Quantum Fund with George Soros, told the Reuters Global Markets Forum that he believed Washington and Beijing would soon announce a trade deal, although the current spat would not be the last time Trump tried to exploit the prospect of a trade war.

“These are negotiating tactics from Mr. Trump at the moment. What will happen is we will have some good news, the market will have a rally. It will probably be the last rally,” he said.

Oil prices briefly rallied after Saudi Energy Minister Khalid al-Falih said that there was consensus among OPEC and allied oil producers to reduce inventories “gently”.

Rising tensions in the Middle East have also supported oil prices in recent days. Trump on Sunday tweeted that a conflict with Tehran would be the “official end” of Iran.

Both U.S. crude and Brent crude jumped more than 1%, before giving up most of those gains as broader risk sentiment soured.

U.S. West Texas Intermediate crude traded at $62.75 a barrel by 1030 GMT after earlier trading above $63. Brent crude was at $72.30 per barrel.

In currency markets, the Australian dollar jumped nearly 1% to $0.6890 after the center-right Liberal National Coalition pulled off a shock win in a federal election, beating the center-left Labor party.

The Indian rupee also rallied , gaining more than 1% to 69.36 rupees per dollar after exit polls pointed to a majority for Prime Minister Narendra Modi’s Bharatiya Janata Party and allies.

China’s offshore yuan rebounded after touching its weakest against the dollar since November on Friday. It last traded up 0.1% at 6.944 per dollar.

China’s central bank is expected to use foreign exchange intervention and monetary policy tools to stop it weakening past the psychologically important 7 yuan-per-dollar level in the near term, sources told Reuters.

The dollar was little changed against the euro at $1.1155.

Sterling recovered 0.2% to $1.2741 after suffering its biggest weekly loss since 2017 after an apparent collapse in Brexit talks in London.

German government bond yields edged higher. That followed a fall toward new 2-1/2 year lows last week after investors nervous about trade and a global economic slowdown flocked to safe-haven debt.

The 10-year U.S. Treasury yield was little changed at 2.396%.

Austrian yields held firm after a scandal prompted Chancellor Sebastian Kurz to pull the plug on his coalition with the far right at the weekend, raising the chances of a snap election.

Reference: Tommy Wilkes

Trade uncertainty darkens U.S. small caps outlook

NEW YORK (Reuters) - Shares of smaller publicly listed U.S. companies have fallen more on recent U.S.-China trade tensions than larger corporations and could face an even rougher road as the year wears on unless the prospects for economic growth improve.

Wall Street has been forecasting a return to growth for the S&P 600 index of small cap stocks in the second half of 2019, but an intensifying trade battle between the world’s two biggest economies puts these hopes into doubt.

Because they depend less on overseas sales than bigger companies, some investors say small caps may be less vulnerable in a trade war situation.

But if rising tariffs boost import prices to the extent that it slows U.S. economic growth, then smaller companies, which often have less financial cushion than big multinationals, could be badly hurt. And since many U.S. companies use overseas suppliers, tariff hikes could make imported goods too pricey.

“Because they have more domestic sales it doesn’t mean they’re totally insulated,” said Jill Carey Hall, U.S. strategist at Bank of America Merrill Lynch. “If we don’t get a resolution on trade, you don’t necessarily want to own small caps. They tend to fare more poorly in risk-off environments.”

Since U.S. President Donald Trump’s May 5 tweets about raising tariffs on $200 billion of Chinese goods to 25% from 10% the S&P 600 has fallen 5.4% and the Russell 2000 small cap index has declined 4.9% compared with the benchmark S&P 500’s 2.9% drop.

One problem is that companies depending on imports for inventory had no time to stock up in the days between Trump’s tweet and the actual tariff hike, started May 10.

And if the United States fulfills its threat to slap 25% tariffs on another $300 billion of goods that China sells here, that would add to the pressure.

Wall Street is already expecting a first-half earnings recession for the S&P 600 index of small cap stocks.

The average expectation is for a first-quarter earnings per share decline of 18% followed by a 9% second-quarter decline, according to I/B/E/S data collected by Refinitiv analyst David Aurelio.

“This will be the worst reporting season for small caps since 2009,” said Jefferies equity strategist Steven DeSanctis, referring to first-quarter results.

Looking forward, analysts expect third-quarter EPS growth of 6.9% for the S&P 600 and 23.3% growth for the fourth quarter, according to Refinitiv’s Aurelio.

But Wall Street may be too optimistic about the second half of the year, especially if the U.S.-China trade dispute is not resolved, according to DeSanctis, whose firm is predicting a prolonged trade battle.

“For small caps to pick up and resume their outperformance we need to see better trends in the economic data in the second half, which would lead to better earnings growth in the third and fourth quarter, which the Street is expecting,” he said.

In fact, traders in the bond market and fed funds futures are making bets that imply the exact opposite - that U.S. economic growth will weaken.

“There’s definitely a higher probability today that things aren’t going to get better in the second half,” said DeSanctis.

For growth to improve, U.S. consumer spending needs to stay strong, according to DeSanctis, who says the consumer would need to offset weakness in capital spending arising from corporate uncertainty over international trade.

To be sure, the labor market is still strong and wages are still growing. But that may not be enough.

“That’s important people do have money in their pocket to spend,” said DeSanctis, but he said small caps would struggle if tariffs inflate the price of consumer goods.

“If costs are really going to start to escalate, people are going to be far more concerned about their spending patterns,” he said.

Reporting by Sinéad Carew, Chuck Mikolajczak