Closing summary
Spot gold – seen as a safe-haven investment – has just gone through $1,500 an ounce for the first time in more than six years, as financial markets remain jittery. On Wall Street, the Dow Jones has fallen 2.24% to 25,446 while the Nasdaq is down 1.72% and the S&P 500 has lost 1.88%.
In London, the FTSE 100 has turned negative, falling 15 points, or 0.2%, to 7,156. Most major European markets have also slipped into the red, with the exception of Germany’s Dax, which is up 0.1% at 11,571.
- France’s CAC 40 down 0.05% at 5,231
- Italy’s FTSE MiB down 0.97% at 20,431
- Spain’s Ibex down 0.18% at 8,683
Traders have also been rushing into the safety of government bonds as fears of a global downturn in the wake of trade disputes gripped markets.
Andrew Brenner, managing director at National Alliance Capital Markets, told Reuters:
Bonds are being bought in a panic mode.
Earlier, European stock markets staged a recovery following a three-day sell-off, as investors were cheered by White House assurances that the next round of trade talks with China would still go ahead in September. They shrugged off weak German industrial production data that raised fears of a second-quarter contraction (and possibly recession) in Europe’s biggest economy.
The central banks of New Zealand, India and Thailand all cut interest rates today to prop up their countries’ faltering economies.
Thank you for all your comments. We’ll be back tomorrow.
Gold up 26.1% since last year when Nobel Prize winning "economist" Paul Krugman said "gold is dead" pic.twitter.com/BD9PLrJNL3
— Quoth the Raven (@QTRResearch) August 7, 2019
Updated
Gold has been hovering at six-year highs in the last few days, as investors have been seeking out safer investments as the US-China trade war escalated.
Gold hits $1,500 for first time in six years
Spot gold has hit $1,500 an ounce for the first time in more than six years, rising to $1,505.51.
Updated
Wall Street falls at the open
On Wall Street, stocks have opened lower.
- Dow Jones down 331 points, or 1.27%, at 25,698
- S&P 500 down 30 points, or 1.05%, at 2,851
- Nasdaq down 82 points, or 1%, at 7,750
Returning to the theme of government bonds: fears over a global downturn have driven US Treasury yields lower, with 30-year yields close to record lows.
The 30-year yield fell as low as 2.145%, not far from an all-time low of 2.089% set in July 2016, according to Refinitiv data.
Food industry: pause competition law to avoid Brexit food shortages
Britain’s food and drinks industry body has called on the government to suspend competition law in the event of a no-deal Brexit, so companies can work together and co-ordinate supply decisions to avoid food shortages.
My colleague Jasper Jolly writes:
Britain’s food and drinks industry has said companies may have to choose between working together to avert food shortages or paying large fines unless the government steps in to suspend competition law in the event of a no-deal Brexit.
Collaboration between large companies is controlled to prevent cartels harming consumers. The Food and Drink Federation (FDF) told the BBC that the government had not yet confirmed that companies would be able to work together to direct food supplies if there were delays as a result of crashing out of the EU.
At 11pm UK time on 31 October the UK would, by default, become a “third country” in terms of relations with the EU, with no post-Brexit plan in place, and no transition period. The UK would no longer be paying into the EU budget, nor would it hand over the £39bn divorce payment.
The UK would drop out of countless arrangements, pacts and treaties, covering everything from tariffs to the movement of people, foodstuffs, other goods and data, to numerous specific deals on things such as aviation, and policing and security. Without an overall withdrawal agreement each element would need to be agreed. In the immediate aftermath, without a deal the UK would trade with the EU on the default terms of the World Trade Organization (WTO), including tariffs on agricultural goods.
The UK government has already indicated that it will set low or no tariffs on goods coming into the country. This would lower the price of imports – making it harder for British manufacturers to compete with foreign goods. If the UK sets the tariffs to zero on goods coming in from the EU, under WTO ‘most favoured nation’ rules it must also offer the same zero tariffs to other countries.
WTO rules only cover goods – they do not apply to financial services, a significant part of the UK’s economy. Trading under WTO rules will also require border checks, which could cause delays at ports, and a severe challenge to the peace process in Ireland without alternative arrangements in place to avoid a hard border.
Some no-deal supporters have claimed that the UK can use article 24 of the General Agreement on Tariffs and Trade (Gatt) to force the EU to accept a period of up to ten years where there are no tariffs while a free trade agreement (FTA) is negotiated. However, the UK cannot invoke article 24 unilaterally – the EU would have to agree to it. In previous cases where the article has been used, the two sides had a deal in place, and it has never been used to replicate something of the scale and complexity of the EU and the UK’s trading relationship.
The director general of the WTO, Roberto Azevêdo, has told Prospect magazine that "in simple factual terms in this scenario, you could expect to see the application of tariffs between the UK and EU where currently there are none".
Until some agreements are in place, a no-deal scenario will place extra overheads on UK businesses – eg the current government advice is that all drivers, including lorries and commercial vehicles, will require extra documentation to be able to drive in Europe after 31 October if there is no deal. Those arguing for a ‘managed’ no deal envisage that a range of smaller, sector-by-sector, bilateral agreements could be quickly put into place as mutual self-interest between the UK and EU to avoid introducing or to rapidly remove this kind of bureaucracy.
Updated
About $14 trillion of government debt now offers negative yields (interest rates) and US government bonds could soon follow suit due to the escalating US-China trade war, says Joachim Fels, a global economic adviser for the Californian investment firm Pimco. He writes on his blog:
It is no longer absurd to think that the nominal yield on US Treasury securities could go negative. Last week the German 30-year government bond yield dipped into negative territory for the first time ever. Around $14 trillion of outstanding bonds worldwide, or 25% of the market, now trade at negative yields, according to Bloomberg.
What was once viewed as a short-term aberration – that creditors are paying debtors for taking their money – has already become commonplace in developed markets outside of the US. Whenever the world economy next goes into hibernation, US Treasuries – which many investors view as the ultimate “safe haven” apart from gold – may be no exception to the negative yield phenomenon. And if trade tensions keep escalating, bond markets may move in that direction faster than many investors think.
Think U.S. government bonds won’t go negative? Pimco analyst says think again https://t.co/wFcwnpoX8y
— MarketWatch (@MarketWatch) August 7, 2019
Another day, another low in Bund yields. 10y German govt bond yields hit fresh low of -0.56% following dismal econ numbers. Germany may be heading for a recession. pic.twitter.com/eBNeTCeVtT
— Holger Zschaepitz (@Schuldensuehner) August 7, 2019
Three central banks cut rates
New Zealand’s central bank surprised markets with a half-point rate cut this morning to rekindle sluggish growth, and a suggestion that rates could even go below zero.
The Bank of India then delivered its fourth rate reduction this year, cutting its key lending rate to the lowest level in nine years to prop up the country’s faltering economy. And the Bank of Thailand also cut its benchmark interest rate, for the first time since 2015 to support growth and weaken the strong baht.
Craig Erlam, senior market analyst UK & EMEA at trading platform Oanda, says:
We’re seeing a bit of a rebound in early European trade on Wednesday, with US futures also a little higher as markets take a breather from the recent sell-off.
It’s too early to even try and associate this with any form of optimism given the events of the last week, while the size of the rebound compared to the days before gives it more an appearance of a dead cat bounce than anything else. There’s been a lot to digest and I wonder whether investors are simply taking a step back and doing just that.
We’ve seen rate cuts overnight from the Reserve Bank of New Zealand, Reserve Bank of India and Bank of Thailand that have all exceeded market expectations which may be helping the rebound, given investors craving for more and more monetary stimulus. It may not yet be coming from the central banks they demand it from most but the mood is clearly shifting.
Updated
Morning summary
European shares have recovered after a three-day sell-off, after the White House softened its rhetoric in its trade war with Beijing. Senior adviser Larry Kudlow said the Trump administration was still planning to host a Chinese delegation for talks in September.
The FTSE 100 index in London is 63 points ahead at 7,235, a 0.88% gain. Europe’s Stoxx 600 climbed nearly 1%, as all major bourses rose.
- Germany’s Dax up 1.53% at 11,744
- France’s CAC 40 up 1.37% at 5,306
- Italy’s FTSE MiB up 0.7% at 20,776
- Spain’s Ibex up 1.17% at 8,801
However, gold, the Japanese yen and government debt – considered safe-haven assets – are still in demand, as markets stay cautious amid lingering trade tensions. Spot gold has gained 0.9% and, at $1,487 an ounce, is heading towards $1,500. It hit $1,490.84 at one stage, its highest level since April 2013.
Yields on long-dated government bonds fell across the eurozone, with the German and Dutch yields hitting record lows in negative territory, after weak German industrial production and the bigger-than-expected interest rate cut in New Zealand reignited a rally in bond markets (when bond prices go up, yields fall). Germany’s benchmark 10-year bond yield slid to -0.58% while the Dutch equivalent fell to -0.478%.
Updated
The British Airways IT glitch has caused chaos for passengers wanting to travel from London to their holiday destinations. Tell us if you have been affected.
#BritishAirways waiting on tarmac for 2 hrs to fly to Glasgow.. Can you please let your CIO/CTO know that we can help to debug your IT issues... your SLAs on Sev-1 issues are worse.. please fix pic.twitter.com/KCIQ75MywW
— Sridhar Somaraju (@sridharsomaraju) August 7, 2019
— British Airways (@British_Airways) August 7, 2019
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Pound declines, close to 2-year lows
The pound is declining again today and is trading close to two-year lows versus the dollar and the euro. It is down 0.21% against the dollar at $1.2145, not far from the 31-month low of $1.2080 reached last week. Against the euro, sterling is 0.12% lower at €1.0855, not far from the 23-month low hit yesterday.
The risk of a no-deal Brexit has increased markedly under Boris Johnson’s government. When he became prime minister a fortnight ago, he said he would take Britain out of the EU at the end of October “do or die”.
Divisions between the UK and the EU have become more entrenched, with No 10 seemingly intent on a no-deal departure – while Michael Gove, the Cabinet Office minister who is in charge of no-deal preparations, has accused the EU of intransigence over Brexit talks.
Investors are also fretting about the possibility of a no-confidence vote in the new Conservative government after the summer recess, or an early general election.
Derek Halpenny, head of research at the Japanese bank Mitsubishi UFJ Financial Group, told Reuters:
There are many key dates ahead for sterling, but the passing of 5 September without a successful of no confidence in the government will in our view be a further important step along the road of a no-deal Brexit on 31 October.
Updated
Oil prices hit seven-month low
The mood in financial markets is still fragile. Oil prices have hit a fresh seven-month low as traders worried about the impact of the US-China trade war on the global economy.
Brent crude, the global benchmark, fell nearly 2% to $58.57 a barrel earlier this morning and is now trading down 0.2% at $58.82 a barrel. Prices have tumbled more than 20% since hitting their 2019 peak in April.
Updated
Markets cheered by US assurances despite weaker yuan
The bounce on European bourses this morning come after three days of declines. Shares in Germany and the pan-European Stoxx 600 – which is up 0.75% – have been boosted by a deal in the chemicals sector involving German giant Bayer.
There was also relief globally after the White House gave assurances last night that it wants to press ahead with trade negotiations with Beijing, after both sides ramped up their rhetoric in recent days.
On Friday, Donald Trump announced fresh 10% tariffs on $300bn of Chinese imports, whereupon the People’s Bank of China let the yuan fall beyond the symbolic seven-to-one-dollar mark on Monday, for the first time since May 2008. This led to the US Treasury department labelling Beijing a currency manipulator. China strongly rejected this and warned it would destroy the international order and lead to chaos in financial markets, but acted to prop up its currency yesterday.
Larry Kudlow, director of the White House National Economic Council, told CNBC last night that the Trump administration was still planning to host a Chinese delegation for trade talks in September.
Tensions remain, however. The Chinese currency has weakened again today and is trading at 7.0455 per dollar, down 0.3% on the day.
Updated
European stocks extend gains
There is a sense of relief in equity markets this morning, as the standoff between the US and China appears to have eased.
The FTSE 100 in London has turned positive.
- UK’s FTSE 100 up 35 points, or 0.49%, at 7,207
- Germany’s Dax up 1.27% at 11,815
- France’s CAC 40 up 0.9% at 5,281
- Italy’s FTSE MiB up 0.44% at 20,723
- Spain’s Ibex up 0.78% at 8,767
Joshua Elash, director of property lender MT Finance, says:
The market is flat and house prices are down again month-on-month, but the shift is relatively small.
However, there is a risk that come the autumn, the robustness of the property market will be put to the test. If Brexit or deflationary forces lead to the Bank of England increasing the base rate, there will be consequential pressure on homeowners to sell as they struggle to deal with meeting the cost of increased mortgage payments. In this scenario we would expect to see more significant downward pressure on prices.
Here is some instant reaction to the Halifax house price figures, which showed a 0.2% drop in July.
Jeremy Leaf, a north London estate agent and a former Royal Institution of Chartered Surveyors residential chairman, says:
The Halifax figures always command respect, not least because they are well-established and have a good track record of accuracy.
They confirm what we are seeing on the ground - that there has been no real change to house prices recently and no significant change is expected as buyers, in particular, seem to be looking beyond Brexit irrespective of the outcome.
Prices are being underpinned by shortage of stock, improving affordability and low mortgage rates. What is more important is the number of transactions, which remain sluggish and protracted as sellers reluctantly come to terms with new market realities.
BA glitch causes flight cancellations and delays
An IT glitch has affected online check-in at British Airways, leading to long queues at check-in desks, flight cancellations and delays. London’s Heathrow, Gatwick and City airports are affected by the glitch.
My colleague Jasper Jolly writes:
The airline said it has moved to back-up manual systems to keep some flights operating.
British Airways said it was offering customers the chance to move bookings to another travel day between 8-13 August.
About half of the British Airways flights scheduled to depart from Heathrow’s terminal five between 9.30am and midday were cancelled or delayed, according to the airport’s website.
Halifax: UK house prices fall 0.2% in July
House prices in the UK have fallen for a second month, according to Halifax, one of Britain’s biggest mortgage lenders. The average price of a home dropped 0.2% in July from June to £236,120, while the annual growth rate slowed to 4.1% from 5.7%. In June, prices fell by 0.4%.
Russell Galley, managing director at Halifax, said:
The average UK house price fell slightly for a second month, as the market continues to tread water with marginal increases or decreases in each monthly period. That said, it’s worth remembering that while economic uncertainty continues to weigh on the market, the overall trend actually remains one of comparative stability, with average prices down by less than £600 over the last three months.
We have seen a reported drop off in the number of properties sold during the early months of summer, which may lead some to speculate a downturn is on the horizon. However, new buyer enquiries are up, and favourable mortgage affordability – driven by low interest rates and strong wage growth – should continue to underpin prices for the time being.
In the longer-term, we believe there is unlikely to be a step change in market activity until buyers and sellers see some form of resolution to the current economic uncertainty.
German industrial slump raises recession fears
The poor German industrial production figures have raised the spectre of a recession, according to some economists. The German economy is widely expected to have at best ground to a halt in the second quarter, following 0.4% growth in the first quarter.
The German government expects the economy to grow just 0.5% this year, picking up to 1.5% next year.
Andreas Scheuerle from DekaBank expects an economic contraction of 0.2% in the second quarter.
We assume that this is the prelude to a technical recession.
A technical recession is defined as at least two consecutive quarters of contraction. Preliminary figures for the second quarter, from April to June, will be released next Wednesday by the German Federal Statistics Office.
Updated
The FTSE 100 index in London is trading 7 points lower after the open, slipping 0.1% to 7164. Meanwhile, European shares are higher in early trading.
- Germany’s Dax up 0.6%
- France’s CAC 40 up 0.3%
- Italy’s FTSE MiB up 0.18%
- Spain’s Ibex up 0.5%
Andrew Kenningham, chief Europe economist at Capital Economics, says the fall in German production has killed off hopes of a recovery in the third quarter. Germany relies heavily on exports, and has been hit hard by trade disputes.
The breakdown shows that the fall was fairly broad-based, affecting all major sectors except for construction, where output was up marginally.
Business surveys uniformly point to a further contraction in July, so things look set to get worse rather than better – even if the US refrains from imposing tariffs on the EU and a no-deal Brexit is avoided.
In the second quarter as a whole, German industrial output fell by 1.8% compared with the previous quarter, driven by steep declines in metal production, machinery and car manufacturing.
Carsten Brzeski, chief economist at ING Germany, says the slump bodes ill for GDP growth in the second quarter.
Looking ahead, despite yesterday’s encouraging industrial orders data, the combination of high inventories and few orders at hand does not bode well for industrial production in the months ahead. Add to this a further escalation of the current trade conflicts, Brexit and an ongoing structural transformation in the automotive sector and the outlook doesn’t look any better. Against this background, recent tentative signs that the domestic economy’s resilience is crumbling are concerning.
All in all, we would characterise today’s industrial production report as devastating, with no silver lining. Today’s data also shows that we should prepare for contraction in the German economy in the second quarter, unless exports bring an unexpected surprise on Friday.
Updated
Introduction: Markets remain tense amid US-China standoff
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
Markets remain on tenterhooks as the standoff between the US and China in their prolonged trade dispute continues.
Following a two-day sell-off in global stock markets, the mood lightened yesterday after the Chinese central bank fixed the yuan at a slightly firmer rate, while strongly rejecting Washington’s branding of Beijing as a currency manipulator.
European stocks traded higher for most of the day but closed lower. The FTSE 100 index in London was under more pressure as the pound strengthened, and fell 0.72%. Wall Street staged a recovery, with the Dow Jones rising 1.2% and the S&P 500 gaining 1.3%.
Donald Trump hinted strongly yesterday that he was ready to dig in for the long term in the trade war, tweeting he was prepared to provide support for US farmers in 2020 should they face pressure from China.
As they have learned in the last two years, our great American Farmers know that China will not be able to hurt them in that their President has stood with them and done what no other president would do - And I’ll do it again next year if necessary!
— Donald J. Trump (@realDonaldTrump) August 6, 2019
German figures out this morning showed a monthly fall of 1.5% in industrial production in June, far steeper than the 0.4% drop predicted by economists and compared with 0.1% growth in May. This adds to signs that Europe’s biggest economy shrank in the second quarter, which will act as a drag on the eurozone.
Andrew Kenningham, chief Europe economist at Capital Economics, says:
The 1.5% fall in German industrial production in June kills off any hopes that the strong orders data published yesterday marked the beginning of a recovery.
Asian shares fell for an eighth day, with Japan’s Nikkei losing 0.33% while Hong Kong’s Hang Seng slipped 0.09%. New Zealand’s central bank stunned markets by cutting interest rates by a half-point to 1% and said rates could even go below zero.
Looking ahead to the European opening, Craig Erlam, senior market analyst at trading platform Oanda, says:
European futures are looking a little flat ahead of the open on Wednesday as investors watch on nervously for any further escalation in the trade war between the US and China.
We’ve gone from being hopeful a couple of weeks ago that talks in Shanghai would aid progress towards a deal and the removal of tariffs, to new tariffs, China no longer buying US agricultural goods and the US labelling China a currency manipulator. That’s some escalation in a little over a week.
The agenda
- 8:30am BST: UK Halifax house prices (July)
Updated
