With this, we are closing the blog for the day. Thank you for all your comments, and good-bye – we will be back tomorrow.
Copper has fallen to a new nine-month low ahead of the implementation of trade tariffs by China and the US on Friday, which could hit demand for the industrial metal.
Benchmark copper on the London Metal Exchange slipped 0.6% to $6,450 per tonne, the lowest since September 2017.
Julius Baer analyst Carsten Menke said:
Trump is not fostering global trade. There is scrutiny about the export side of the market in terms of copper-containing household goods or electronics being shipped out of China and we believe that will stay with us at least until US mid-term elections in November.
Trade wars
Let’s return to trade wars. “Trade wars are good and easy to win”, so says Trump who last weekend railed against the EU for being as “bad as China” on trade practices, writes Michael Hewson, chief market analyst at CMC Markets UK.
The rhetoric over global trade has been ramped up in recent weeks. Hewson adds:
The decision by the US to raise tariffs on imports of steel and aluminium may well protect US jobs in this particular area but it will also raise costs in the areas of the US economy that use these metals, like auto, construction and manufacturing.
This will likely mean higher prices and higher inflation which in turn will hit the US consumer which at the moment, despite a tight labour market is only seeing modest wage growth. This would suggest that in seeking to protect US industry from cheap imports domestic prices could well rise causing US businesses to shed staff to cope with higher costs. In 2002 the Bush administration adopted similar measures on steel however they were abandoned after 18 months as a raft of US companies in related industries went bust as costs increased.
While the US does have a point about Chinese steel dumping the scattergun effect of his trade sanctions will also serve to penalise the US’s historical partners and allies, with Canada being hit the hardest.
Hewson (and others) believe that trade wars are bad and usually hurt the very people they are designed to protect.
The EU has retaliated with a modest range of tariffs on US imports, to the tune of €2.8bn, on goods like motor cycles, whisky and orange juice. Canada has also followed suit, and China will weigh in later this week, with the risk that the US will respond further as it targets the EU’s huge automotive sector, the US being its second biggest export market.
This raises the prospect of making a bad situation worse with consumers likely to bear the brunt, and while one can sympathise with the fact that the US is behaving irrationally, surely the best way to deal with the US is to play the game a different way.
Tit for tat responses rarely end well, with the reactions to Smoot Hawley in the 1930’s being used as a historical precedent, as rising costs impacted on domestic consumers. Furthermore, there are significant anomalies on how the EU levies tariffs on US imports, which suggests that President Trump has a point about some of the EU’s trade policy.
Rather than dealing with the US by way of counter punch the EU would best serve its consumers by way of engaging with the Trump administration in a more constructive fashion, holding back from kneejerk retaliation and displaying a willingness to negotiate in the expectation that we could see a ratcheting down of some of the recent trade tension that is currently spooking investors.
This approach worked in 2002 when the Bush administration was forced to abandon its steel tariffs after 18 months under pressure from US businesses who were adversely affected by the increases in costs.
Updated
Earlier today, it emerged that a former Rio Tinto executive has been released from a Shanghai prison, after serving eight years in jail following a 2010 conviction for corruption and stealing commercial secrets.
Hu, an Australian citizen and the former head of the mining company’s China iron ore business, was originally sentenced to 10 years in jail as tension flared between China, the world’s top user of iron ore, and its biggest supplier, Australia. Fired by Rio in the aftermath, Hu is expected to return to Australia.
Chinese foreign ministry spokesman, Lu Kang, told a daily news briefing in Beijing that Hu had been released on Wednesday. Lu said that Hu had had his sentence reduced in accordance with the law, without saying where Hu currently was nor when he might return to Australia.
Here is the full story:
Here’s another comment on the UK services data released this morning, from Malcolm Barr at JPMorgan. The stronger-than-expected reading, which points to GDP growth of 0.4% between April and June, coupled with a pickup in inflationary pressures has cemented the view among City economists that the Bank of England will hike interest rates next month.
The Markit/CIPS PMI saw the business activity reading climb to 55.1 in June, taking it back in line with the average reported since the series began in 1996. The employment component moved sideways at close to average levels, while business expectations were little changed, sitting toward the bottom end of the range seen since the Brexit referendum in 2016.
Taken as a whole, the business survey data for June lend more weight to the idea that the weakness in growth reported for 1Q was temporary: our version of the composite PMI has recovered to sit slightly above its average, having been a couple of points below it in March. Indeed, the weakness in the reported IP data through to April is looking increasingly like an outlier in the data. We continue to look for the MPC to raise rates in August, and see the dataflow and recent MPC commentary as raising confidence in that view.
Here’s the statement in full from Beijing’s finance ministry, courtesy of Reuters.
The Chinese government’s position has been stated many times. We absolutely will not fire the first shot, and will not implement tariff measures ahead of the United States doing so.
Earlier, we thought that the Chinese tariffs on $34bn of US goods ranging from soybean to stainless steel pipes would kick in before the similarly-sized tariffs from Washington, after an unnamed source told Reuters that Beijing’s tariffs would take effect at the start of the day on 6 July, and other similar media reports. Due to the 12-hour time difference, this would have put the implementation ahead of Washington’s.
The ministry then issued the brief statement above.
Earlier, the Chinese foreign ministry spokesman Lu Kang said China was ready to act, although he gave no details on the timing of tariffs.
China has already made preparations.
As long as the United States issues a so-called tariff list, China will take necessary measures to firmly protect its legitimate interests.
China denies it will fire first shot in trade dispute
China has denied that it will fire the first shot in an escalating trade dispute with the US.
Beijing’s finance ministry said in a statement it would not implement its tariffs on US goods before Washington’s tariffs on Chinese imports take effect, according to Reuters.
Both sides have threatened 25% tariffs, on a combined $68bn of goods, which are due to kick in on 6 July (Friday).
We are awaiting further details...
Updated
Here our story on the UK outlook:
A stronger-than-expected UK services reading, which suggests an improved growth outlook for Britain, has helped the pound this morning. Sterling is extending gains against the euro, rising 0.4% to 88.01p.
Jennifer McKeown at Capital Economics said about the eurozone numbers:
This is a sign that at least some of the weakness in the first quarter was temporary and at least suggests we are not embarking on the start of a sharp slowdown.
There has been some stabilisation in the surveys if nothing else. That will reassure the ECB that a gradual normalisation of policy is warranted.
Here is our full story about the impending trade war between Beijing and Washington.
Eurozone business activity up, indicating Q2 GDP growth of 0.5%
Over in the eurozone, it’s a similar story. Business activity picked up in June, according to the latest PMI reports, making it easier for the European Central Bank to tighten policy – although it should be noted that confidence among companies declined to its lowest level since late 2016.
The ECB has already set out plans to end its bond buying programme by the end of the year, dismantling the economic stimulus a decade after the eurozone’s economic downturn started. However, interest rates are likely to stay on hold for quite some time, and ECB president Mario Draghi might leave office in October 2019 without having raised rates once during his eight-year term.
IHS Markit’s final composite purchasing managers’ index for the eurozone – which combines data from manufacturing, construction and services and is seen as a good indicator of economic growth – rose to 54.9 in June from 54.1 in May, comfortably above the 50 mark that divides growth from contraction.
IHS Markit said this signalled second-quarter GDP of 0.5% in the eurozone (which compares with an estimated 0.4% for the UK).
Services firms have not been hit as hard as manufacturers by the increasingly bitter trade dispute between the EU and the US.
Donald Trump’s tariffs on European steel and aluminium are driving up costs for US manufacturers and exacerbating a slowdown for eurozone factories, IHS Markit’s manufacturing survey showed on Monday.
Updated
Markit’s PMI reports suggest that UK companies grew rather faster in June than in March, when snow was dragging the economy back.
Jacob Nell of Morgan Stanley says they are “consistent with a robust rebound” in the second quarter of 2018:
ING economist James Smith also spies a UK interest rate hike on the horizon....
Just like the manufacturing and construction indices, the latest UK services PMI has beaten expectations. At 55.1, it now stands at the highest level since October, and despite the ongoing uncertainty surrounding Brexit, new orders are rising at the fastest rate in over a year too.
This, much like the recent data emerging from the retail sector, suggests that the economy is having a better ride in the second quarter than in the first - and for the Bank of England, this will be put a fairly big tick in the August rate hike box
The jump in UK service sector growth has helped the pound to shake off its early losses.
Sterling has crept back over $1.32, having dropped to $1.317 earlier, as traders conclude that an August interest rate hike is now a little more likely.
Balraj Sroya, Sales Trader at Foenix Partners, explains:
The Services PMI print today concluded a trifecta of phenomenal PMI figures from the UK this month, posting 7-month highs at 55.1. The bullish figures from the Services, Construction and Manufacturing sectors, along with GDP beating estimates last week, prove the UK economy is gaining momentum once again.
As a result, the likelihood of the Bank of England raising rates this summer has strengthened, with chances currently sitting over 60% in favour of a hike.
The pick-up in growth does have a downside. Companies are struggling to find skilled staff to help them tackle their new orders.
Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply, explains:
“Exceeding expectations the sector ended on a positive note at the end of the second quarter, buoyed up by the fastest rise in new orders in over a year and the strongest overall performance since last October.
“However the downside of this achievement came in the form of relentless capacity difficulties as business backlogs rose to an acute degree, not seen for around three years. Not even the minor uplift in hiring could alleviate the problem as salary pressures and the struggle to find skilled hires caused firms to hesitate to increase staff numbers further.
Add increased costs for fuel, and the picture emerges of a sector experiencing the sharpest cost inflation since September last year, as well as the confidence to pass on these additional costs to their clients to maintain their margins.
This is actually good news for workers, though, with some companies reporting that staff salaries have risen as they try to attract and retain employees.
Updated
Today’s forecast-beating services data shows that Britain has recovered from the winter slowdown - when the ‘Beast from the East’ forced school and shops to close.
Jeremy Thomson-Cook, chief economist at WorldFirst, comments:
“These are the best sentiment numbers for the UK services industry since October and highlight that the sector is continuing to bounce back from the weather affected Q1 that saw shops shuttered and supply lines cut.
Both growth and inflation within the services sector and the wider economy are set to have risen in Q2 with the PMIs for the period hinting at a GDP number of 0.4-0.5% with inflation higher on both higher fuel and wage costs.”
Service sector growth makes rate hike more likely
The pick-up in growth last month will encourage the Bank of England to raise interest rates in August, suggests Capital Economics:
Today's stronger-than-expected services PMI makes the all-sector output balance consistent with GDP growth of 0.4% q/q in Q2. That is in line with the MPC's forecast, leaving the committee on course to raise Bank Rate in August. pic.twitter.com/2sFLzeuMVd
— Capital Economics (@CapEconUK) July 4, 2018
UK service sector growth hits eight-month high
Boom! Britain’s dominant service sector has picked up pace, suggesting that UK economic growth has accelerated in the last quarter.
Service sector firms enjoyed the strongest rise in activity since last October, data firm Markit reports, thanks to a rise in new orders.
Companies reported a pick-up in demand, particularly from particularly for business and financial services. Some companies also got a boost from the warm weather, as consumers hit the shops.
This has propelled Markit’s service sector PMI up to 55.1 in June, from 54 in May. That’s a stronger result than expected.
Markit’s surveys indicate that UK GDP rose by around 0.4% in the last three months - twice as fast as in January-March.
Chris Williamson, chief business economist at IHS Markit, explains:
“Stronger growth of service sector activity adds to signs that the economy rebounded in the second quarter and opens the door for an August rate hike, especially when viewed alongside the news that inflationary pressures spiked higher.
“The survey data indicate that the economy likely grew by 0.4% in the second quarter, up from 0.2% in the opening quarter of 2018. The sharp rise in business costs, linked to surging oil prices and the need to offer higher wages, suggests inflation will also pick up again from its current rate of 2.4%.
“It remains encouraging yet also surprising that current business activity continues to show such resilience amid relatively moribund confidence regarding the year ahead outlook. The survey once again highlights how the business outlook remains clouded by widespread concerns about the impact of Brexit uncertainty in particular.
Updated
Just in: Eurozone service sector growth picked up last month, suggesting Europe’s economy is recovering after a weak start to 2018.
Data firm Markit’s eurozone services PMI has risen to 55.2, up from May’s 53.8.
This makes up for a slowdown at Europe’s factories, where growth slowed last month.
Markit says:
The eurozone economy regained some traction at the end of the second quarter. Rates of expansion in output and new business accelerated, although failed to fully recover the momentum lost earlier in the year.
The main impetus was provided by the services economy, which saw growth accelerate to a four-month high, offsetting a further waning in the pace of increase in manufacturing production.
However, business optimism at eurozone service companies has dropped to a 19-month low. Markit cites “rising trade worries and political uncertainty” as likely causes.
Beijing policymakers will be relieved to hear that growth in China’s service sector rose last month, despite trade war jitters.
The monthly Chinese service sector PMI rose to 53, the highest in four months, showing accelerating growth. Service companies reported a pick-up in new orders, encouraging them to take on more staff.
#China services activity expands the quickest for four months in Jun, according to #Caixin #PMI. Employment and new business indices both climbed moderately, pointing to a positive trend in the service supply and demand sides. More here: https://t.co/L8Wa0k3l9h pic.twitter.com/p0jcW3oCEP
— Markit Economics (@MarkitEconomics) July 4, 2018
#China Composite #PMI rises to 53 in June! pic.twitter.com/lLnCSLpVWW
— jeroen blokland (@jsblokland) July 4, 2018
However, the picture is less rosy at China’s manufacturing companies, where new orders fell last month.
Trade war worries are hit metal prices today.
Copper has dropped to a nine-month low (at $6,423 per tonne) while zinc touched its lowest level in a year.
That reflects concerns that economic demand will be hurt by the looming US-China tariffs.
Chinese stock market hits two-year low
China’s stock market has dropped again today, as traders fret about the escalating trade dispute with America.
The benchmark Shanghai Composite index fell 1% to finish the day at 2,760 points, its lowest closing point since March 2016.
With US and China both finalising tariffs on each others goods, further jitteriness is likely.
Mark Haefele, chief investment officer at UBS Global Wealth Management, explains:
“Investors should expect volatility to continue. Uncertainty over interest rates, protectionism, and China are key risk factors.
We recommend investors stay invested, but consider five actions: looking to alternatives, hedging equity exposure, improving credit quality, diversifying sector and country risks, and taking a longer-term view.”
Updated
Introduction: China to introduce tariffs on Friday
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
The trade dispute between the US and China is heating up.
Beiijng is preparing to impose 25% tariffs on over $30bn of American imports, including agricultural products and manufacturing items, in response to Donald Trump’s own tariffs on Chinese imports which kick in on Friday.
And it appears that China will actually get its retaliation first - officials are preparing to implement the tariffs from midnight on July 6, or noon Washington time tomorrow (5pm UK time).
Reuters has the details:
Chinese tariffs on $34bn of U.S. goods will take effect from midnight July 6 Beijing time, a person with knowledge of the plan told Reuters, amid worsening trade tensions between the world’s two largest economies.
Washington has said it would implement tariffs on $34bn of Chinese imports on July 6, and Beijing has vowed to retaliate on the same day.
However, the 12-hour time difference puts Beijing ahead in terms of actually implementing the tariffs.
“Our measures are equal and being equal means that if theU.S. starts on July 6, we start on July 6,” the source told Reuters, who requested anonymity as they were not authorised to speak to media.
“The implementation time for all policies starts at midnight.”
Its Game On... #CHINA TO IMPLEMENT #TARIFFS ON $34 BLN WORTH OF #US GOODS FROM MIDNIGHT BEIJING TIME JULY 6 - SOURCE
— Michael (@mnicoletos) July 4, 2018
Economists had hoped that Washington and Beijing might step away from actually imposing the tariffs they had threatened each other with. But neither side has backed down, despite the real risk that the measures will hurt growth and cost jobs.
The prospect of a trade war may cast a shadow over the US today, as it celebrates Independence Day. Wall Street will be closed, so it could be a quieter day generally in the markets.
European stocks are expected to dip.
European Opening Calls:#FTSE 7579 -0.19%#DAX 12315 -0.28%#CAC 5303 -0.25%#MIB 21739 -0.11%#IBEX 9634 -0.28%
— IGSquawk (@IGSquawk) July 4, 2018
Also coming up today
We get a healthcheck on Britain’s and Europe’s service sector, as data firm Markit publishes its last monthly surveys of purchasing managers.
The UK’s services PMI is expected to be unchanged at 54, showing steady growth. Anything higher would be a boost for the British economy, as Westminster wrestles with Brexit negotiations.
Jasper Lawler of London Capital Group says:
Even if service sector activity is stronger than forecast, it may fail to capture investors’ attention for any significant amount of time. Brexit will be firmly back on the agenda, with the Prime Minister due to hold talks at the Chequers residence this weekend, in the hope of finding a solution to the customs partnership with the EU post Brexit.
Theresa May has made a series of pleas to her bickering party to sort out their differences and to the EU, not to decline the third proposal.
The agenda
- 9am BST: Eurozone service sector PMI for June
- 9.05am: Bank of England deputy governor Sam Woods
- 9.30am BST: UK service sector PMI for June
- 10am BST: OECD publishes its annual employment outlook report
- 2.15pm: UK treasury committee hearing on economic crime and digital currencies
Updated
