European markets slump on North Korea tensions
The increasingly tense confrontation between the US and North Korea has again sent investors fleeing from equities and into safer areas such as gold and government bonds. It was a down day across Europe, while Wall Street was also suffering from the growing uncertainty. David Madden, market analyst at CMC Markets UK, said:
The showdown between the two nations has scared off many investors. Whenever dealers hear the word ‘war’ they usually run for the hills, and that is exactly what we have seen today. While tensions are running high, traders will be reluctant to be long...
US equity markets are holding up better than their European equivalents, but a global story like this will shake investors out of the stock markets. US equities, and in particular, the Dow Jones had a great run recently and the political uncertainly between the two countries has encouraged profit taking.
The final scores in Europe showed:
- The FTSE 100 fell 108.12 points or 1.44% to 7389.94, wiping around £27bn off the value of the UK’s top companies and marking its worst one day performance since 18 April this year
- Germany’s Dax is down 1.15% to 12,014.30
- France’s Cac closed 0.59% lower at 5115.23
- Italy’s FTSE MIB fell 0.76% to 21,681.61
- Spain’s Ibex ended down 1.38% at 10,450.0
- But in Greece, the Athens market added 0.02% to 833.78
On Wall Street, the Dow Jones Industrial Average is currently down 165 points or 0.74%, on track for its worst day since the end of June.
On that note, it’s time to close for the evening. Thanks for all your comments, and we’ll be back tomorrow.
Meanwhile the Vix volatility index has jumped 27% on the North Korea situation, hitting a three month high of 14.2.
The fall in the FTSE 100 is due in the most part to the global concerns following the growing tensions between the US and North Korea, but there are other factors.
For a start, some 40 points of the current 114 point or 1.52% decline is due to companies being quoted ex-dividend. Then there is the widening UK trade deficit, as well as news that the NIESR think tank had edged its growth forecast lower.
And housebuilders have been hit by signs of the weakening housing market. Joshua Mahony, market analyst at IG, said:
The housing market decline evident within London over recent months appears to be spreading across the country, with the latest report from RICS highlighting a slowdown in sales. Yesterday’s report from the London School of Economics and VATT suggested the recent stamp duty changes are having a significant negative effect on housing transactions, and today we are seeing that borne out in the RICS data. The continued slowdown we are seeing in house price growth and housing sales is proving a drag on the housebuilder sector, with Barratt Developments and Taylor Wimpey suffering heavily today.
The market slide is continuing, as investors flee to safer areas given the tensions between the US and North Korea. Connor Campbell, financial analyst at Spreadex, said:
The US open did nothing to dispel the day’s tremulous trading, instead causing the European indices to intensify their own losses.
The Dow Jones plunged more than half a percent after the bell, wiping off 130 points to leave the index teetering just above 21900. That’s its worst price since the end of July, raising questions of whether this is the end of the Dow’s recent record run, or just a brief diversion until the US/North Korea situation cools and a parade of proper, Grade A data arrives (for example, next week is looking pretty jam-packed).
The Dow’s drop had serious implications for the rest of the global markets, as investors voiced their concerns about the nuclear threat posed by two very spoilt children. The FTSE is now down a whopping 1.6% – and while roughly third of that decline stems from a chunk of the index going ex-dividend, the rest certainly doesn’t. Not only is the war of words (let’s hope their spat remains verbal) between Trump and Kim Jong Un weighing on the FTSE, but also the disappointment of June’s 9 month high UK trade deficit.
There were similarly alarming slides in the Eurozone. The DAX gradually saw its losses widen to 130 points, sending the German index to a fresh 12 week nadir, while the CAC dropped 0.7% to lurk just above 5100.
Opec raises forecast for oil demand
Opec has forecast higher demand for crude in 2018, and said a rise in the oil price suggested its moves to curb the glut of supply could be having an effect.
In its monthly report, the oil producers organisation said demand next year would reach 32.42m barrels a day, up 220,000 from its previous prediction.
The news has helped push Brent crude 0.9% higher to $53.19 a barrel.
Wall Street follows other global markets lower
US markets have opened lower, with investors nervy amid the rhetoric from the US and North Korea.
The Dow Jones Industrial Average is down 79 points or 0.36% in early trading, pushing it back below the 22,000 level, while the S&P 500 opened down 0.43% and the Nasdaq Composite 0.65% lower.
Meanwhile the FTSE 100 is 1.26% lower and set for its worst day since mid-April. But around 40 points of the near 100 point decline is due to a number of major companies being quoted ex-dividend, when shareholders no longer have the right to the payout.
Updated
Also from the US, producer price inflation came in weaker than expected, another suggestion that any imminent rate rise from the Federal Reserve is unlikely. James Knightley, chief international economist at ING Bank, said:
US PPI comes in well below expectations, suggesting that there is little need for imminent additional policy tightening. Nonetheless, we still see some potential for higher inflation to year end.
The US PPI report for July is surprisingly low, falling 0.1% month on month (consensus was looking for a 0.1% rise), which brings the year on year rate down to 1.9% from 2%. The market and ourselves had been looking for 2.2% or 2.3% year on year reading. Core (excluding food and energy) similarly fell one tenth of a point.
This is the first month on month drop in the headline rate since August 2016 and on the face of it a suggests pretty benign inflation backdrop right now...
It is a surprise because the building blocks pointed to a much strong reading. The combination of the 10% fall in the US dollar helping to nudge up import prices, rising commodity prices (such as oil, which rose 18% trough to peak between June and July) and the underlying strength in the manufacturing sector helping to give a bit more pricing power to producers.
Today’s softer outcome suggests some downside risk for tomorrow’s CPI report, but with the economy growing reasonably and creating jobs in significant numbers, coupled with the factors we cited regarding PPI mean we still think inflation pressures will pick-up over coming months.
Updated
Newsflash from America: The number of US citizens filing new claims for unemployment benefit has risen slightly.
Around 244,000 new ‘initial jobless’ claims were filed last week, up from 241,000 in the previous seven days.
That’s still a low figure, by historical standards, showing how the US labor market remains pretty solid.
NIESR: UK growth rate has slowed
Newsflash: Britain’s economy only grew by 0.2% in the last three months, according to the latest estimate from The National Institute Of Economic and Social Research Research.
If NIESR are right, that means that growth slowed in July, following 0.3% growth in April-June.
It’s much slower than the UK’s trend growth rate, of around 0.5-0.6%, and dangerously close to stagnation.
Amit Kara, head of UK macroeconomic Forecasting at NIESR, said:
“We estimate that economic growth decelerated to 0.2 per cent in the three months to July, compared with 0.3 per cent in the second quarter of 2017. The service sector, which was the main driver for economic growth in the second quarter, appears to have slowed. We see a modest recovery in the second half of this year in response to strengthening global growth and a weaker currency, but on the flip side, consumer spending is likely to be weighed down by weak wage growth and investment spending held back by Brexit-related uncertainty.
Further out, we see quarterly economic growth strengthen somewhat to 0.4-0.5 per cent as the economy rebalances away from domestic demand and towards net trade. Economic growth however, remains below its long-run average growth rate of 0.6 per cent because of subdued productivity growth”.
EIU: Korean conflict is unlikely, but.....
Mike Jakeman, global analyst at the Economist Intelligence Unit. argues that there is only a small chance that the United States and North Korea end up going to war.
But while that’s a relief, Jakeman also fears that Trump’s “bellicose rhetoric” is dangerous, and could drive the two sides into conflict.
He says:
“Rhetoric between the US and the North has intensified over the past year, as evidence has mounted that North Korea is capable of attaching a miniaturised warhead to the top of an intercontinental missile. US intelligence agencies now believe North Korea can do this. The remaining challenge for the North is manufacturing a warhead that can survive the heat of re-entering the earth’s atmosphere from space. However, North Korea’s complete dedication to its nuclear programme, combined with the accelerating progress of recent months, means that this final hurdle is likely to be cleared shortly.
Mr Trump believes that the previous US policy of “strategic patience” failed because it permitted the development of the North’s missiles and warheads. But there is little indication that his bellicose rhetoric is intimidating North Korea’s supreme leader, Kim Jong-un. Indeed, so far as Kim Jong-un is strengthened by evidence of the US’s threat to the North, it cements him in his position and justifies his own aggression.
The danger in the US’s strategy of matching the North’s shrill rhetoric is that the escalating threats lead each to assume the other is moving closer to an attack, until such a confrontation becomes inevitable. The Economist Intelligence Unit believes this risk remains low—a nuclear war would have catastrophic consequences—but that it is rising in proportion to the strengthening of the rhetoric. The positions of two of the three of the main actors are clear. The North will continue to develop its nuclear weapons programme regardless of the US’s threats or any economic pressure generated by tighter international sanctions. China will recalibrate its trade and diplomacy with North Korea in line with UN sanctions, but will avoid instability. The US’s position is the most fluid. A pivot from aggression to containment is likely in the medium term, but the risk of an attack to attempt to damage North Korea’s military capabilities in the short term has risen again.”
The 2% jump in British exports to Europe in April-June shows why we need a full trade deal with the EU after Brexit, says the Institute of Directors.
Nice analysis of UK trade figures from @AllieRenison pic.twitter.com/sdkBkWbYHp
— Andy Bruce (@BruceReuters) August 10, 2017
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The US stock market is expected to fall when it opens in three hours time.
New York traders will probably be cautious, following North Korea’s dismissal of Donald Trump’s ‘fire and fury’ threat, as a ‘load of nonsense’.
The Dow Jones industrial average is being called down nearly 50 points,. That would drag it below the 22,000 mark, hit for the first time this month.
Heightened geopolitical tensions will weigh on shares today, predicts Marketwatch:
U.S. stocks set up for another day of losses as North Korean tensions simmer https://t.co/qrnMyu0sW0
— MarketWatch (@MarketWatch) August 10, 2017
David Madden of CMC Markets reckons traders are on ‘red alert’, in case the situation deteriorates further.
Madden adds:
In tense situation like this, equity markets are move lower exceptionally fast, and investors don’t want to be caught on the wrong side of the markets, so they are getting out now.
Traders would require nerves of steel to starting buying into the stock market now, given standoff between the US and North Korea.
Damian Green, the UK’s first secretary of state and effectively deputy prime minister, has urged the US government to use United Nation’s processes to resolve the North Korea crisis after President Donald Trump threatened “fire and fury” against the Pyongyang regime.
Green was asked by reporters on a visit to Edinburgh whether he thought Trump’s rhetoric was unhelpful or wise given the escalating tensions.
He replied:
“I think the sensible way for people to proceed now is to work through the UN process: that’s what the British government has been supporting and will continue to support.
“We think that over the past months the North Korean government has not been behaving properly and I hope they respond to pressure from the UN.”
Asked what the UK government’s position was on the crisis, he underlined the UK’s preference for a UN-brokered resolution.
“It’s obviously in all our interests to make sure that nothing escalates. We are very strongly in support of the UN process, which has and continues to put pressure on North Korea to stop acting in an irresponsible way and we will continue strongly to support the UN process which will I hope help to deescalate tensions.”
.@DamianGreen watches a performance from members of @SCOmusic, who will benefit from £10m #EdinburghCityDeal funding with a new concert hall pic.twitter.com/FHbb8LjHyc
— Cabinet Office (@cabinetofficeuk) August 10, 2017
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UK exports to Europe jumped in last quarter
Britain’s exports to the EU jumped by 2% in the last three months, but exports to non-EU countries actually fell by 1.4%, according to today’s trade data.
Liberal Democrat leader Sir Vince Cable says it shows that certain promises made during the EU referendum are unfulfilled.
Cable explains:
“As with the extra £350m a week for the NHS, the export boom dreamed up by the Brexiteers is nowhere to be seen.
“The fall in the pound since the referendum has not given a significant boost to UK exporters, but has instead driven up the cost of imports for both businesses and consumers.
“As any half-decent economist will tell you, countries trade most with their closest neighbours. That is why Europe remains by far the UK’s most important export market.
“This underlines the need to protect UK exporters and control our trade deficit by remaining in the single market and customs union.”
Updated
European selloff picks up pace
The selloff in the financial markets is accelerating, as nervousness over the North Korean situation continues to grip trading floors.
Britain’s FTSE 100 has now slid by 80 points, or 1%, and other indices are all in the red too.
European investors are following the lead from Asia overnight, where most markets fell and the South Korean won hit a one-month low.
The potential of armed conflict between North Korea and the US is a serious concern for investors.
The news that Pyongyang is officially working on a plan to attack Guam has added to concerns, deterring them from holding riskier assets. Instead, they’re looking to hold gold (at a two-month high today), the Japanese yen, and US government bonds.
Joshua Mahony of IG says
For now, tensions are high, yet in all likeliness we will see this intensity simmer down somewhat, with both sides standing to lose more than they would gain from military action.
Howard Archer, Chief Economic Advisor to the EY ITEM Club, is also disappointed by Britain’s trade data:
A fall in exports and rise in imports caused the monthly trade deficit to nearly double. And, a deficit of £8.9bn in the second quarter of 2017 suggests that net trade made no contribution to growth in the quarter.
Evidence of rebalancing, at least in the ‘hard’ data, remains absent.”
No sign of Britain’s economy rebalancing here....
Biggest monthly fall in UK goods export volumes in July since Brexit vote #macrobond pic.twitter.com/Fgu4OI8aSe
— Ben Chu (@BenChu_) August 10, 2017
Ranko Berich, Head of Market Analysis at Monex Europe, fears that Britain’s trade gap will get worse before it gets better.
He says:
“The export-driven pickup in manufacturing, hoped for by some, has yet to materialise in the UK, despite survey data from the sector remaining reasonably optimistic. Instead, Manufacturing Production remained flat on the month while the goods trade balance fell further into negatives.
“Following a large currency shock, the sort we saw in the aftermath of the referendum, adjustments in trade balance typically follow a “J-Curve”, at first getting worse before they improve. Of course, it’s a long way from economic theory to reality and the length of this adjustment process is highly variable and difficult to predict, but June’s data suggest we’re not quite at the bottom yet, to say the least.”
Here’s what a J-Curve looks like, via the National Graduate Institute for Policy Studies:
More details here, for readers who enjoy an economics lecture.
BCC: Britain's trade figures are disappointing
In theory, a weak currency ought to help a country’s exporters and improve its trade figures.
But today’s data show that this isn’t really happening in Britain, as it continues to consume more goods and services than it sells to the rest of the world.
That’s because modern trade is complex, with many companies buying raw materials or parts from abroad before selling their finished goods overseas.
Suren Thiru, Head of Economics at the British Chambers of Commerce (BCC) explains:
“The sharp deterioration in the UK’s net trade position in June was disappointing, and means the trade deficit in the second quarter of this year came in slightly higher than in the previous quarter. Taken together with the recent jump in the current account deficit, signals the continued weakness of the UK’s external position. The widening in the UK trade deficit in June was largely driven by a sharp rise in imports.
“Businesses continue to report that the slump in the value of sterling since the EU referendum remains something of a double-edged sword, as many exporters are also importers, and so face higher input costs due to the weakening currency. While stronger global economic growth may help to boost the UK’s export performance over the second half of the year, it is unlikely to be sufficient to prevent an overall weakening in growth.
This chart, from today’s trade reports, underlines how there’s been no real improvement in Britain’s trade gap since the Brexit vote:
Ms Lee Hopley, chief economist at EEF, the manufacturers’ organisation, warns there are “scant signs” in today’s data that net trade could give Britain’s economy a growth burst.
Ben Wright of the Daily Telegraph agrees that the goods trade figures are bad:
The UK's goods-trade deficit bowled a googly in June: widened to £12.7bn. Exports -0.7%; imports +3.3%.
— Ben Wright (@_BenWright_) August 10, 2017
The ONS has also reported that UK manufacturing output was flat in June, meeting City forecasts.
However, the wider measure of industrial production jumped by 0.5% in the month - beating expectations.
Economist Rupert Seggins reminds us that Britain hasn’t achieved a trade surplus in almost 20 years.....
UK trade. Last quarterly:
— Rupert Seggins (@Rupert_Seggins) August 10, 2017
Trade surplus: 1997 Q3
Goods surplus: 1982 Q4
Services deficit: 1966 Q1 pic.twitter.com/DSo0P8jKOL
Britain’s worsening trade gap was driven a 4.9% slump in the volume of goods exported in June.
That’s the worst performance since June 2016, the month of the Brexit referendum.
Updated
UK trade gap widens to nine-month high
Newsflash! Britain’s trade deficit WIDENED by £2bn in June, dashing hopes that the gap between imports and exports might have narrowed.
The UK’s total trade deficit in goods and services hit £4.6bn in June, up from a (downwardly revised) £2.5bn in May. That’s the widest deficit in nine months.
The Office for National Statistics blames a surge of imports during June.
It says:
This was mainly due to an increase in imports of both goods and services of £1.7 billion.
Of this, imports of goods contributed £0.6 billion, with imports in machinery and transport equipment (specifically mechanical machinery, aircraft and road vehicles) from EU countries up by £0.5 billion.
The goods deficit swelled to £12.7bn, the ONS adds, a worse reading than expected.
June goods trade deficit: -£12.7 billion (-£11 billion expected)
— Mike Bird (@Birdyword) August 10, 2017
Next time!
More to follow
Pound hits three-week low
The pound has fallen back through the $1.30 mark this morning, to a three-week low of $1.2952.
That’s partly because the dollar is strengthening, as investors look for safe havens.
The news that North Korea was formulating an attack on Guam sent shares down across Asia.
Sam Chi Yung of South China Financial Holdings said:
“The North Korea situation is still unstable and investors are controlling risk and taking profit after recent gains.”
Asia stocks fall as N. Korea angst continues to provide an excuse or opportunity for further profit taking. Won drops while Gold almost unch pic.twitter.com/kYtHRqjv9q
— Holger Zschaepitz (@Schuldensuehner) August 10, 2017
One of Donald Trump’s assistants, Sebastian Gorka, spoke about the situation on Radio 4 today:
“Donald Trump has been unequivocal: he will use any appropriate measures to protect the United States and her citizens.
We do not telegraph our future scenarios and how we are going to react,” he said. “If you show players around a table your poker hand, you will lose that game. It is not a good idea in cards, it is a very bad idea in geopolitics.”
AFP Graphic on the detailed #NorthKorea plan to target the area around US territory of #Guam pic.twitter.com/HZneKhOmIW
— AFP news agency (@AFP) August 10, 2017
European stock markets have also added to yesterday’s losses in early trading.
The French, German and UK markets are all in the red in early trading.
In London, the FTSE 100 tumbled by 40 points to a one-week low.
Mining shares are leading the fallers, reflecting concerns that the North Korea crisis could hurt the economy and dent demand for commodities.
Connor Campbell of SpreadEx says:
The FTSE suffered another sharp fall at the open, as the latest developments in the US/North Korea situation weighed on its commodity stocks.....
It appears that Pyongyang’s detailed strike plan against Guam has created a sour backdrop to trading.
(The FTSE 100’s decline is also partly because some major companies have gone ‘ex-dividend’, meaning new shareholders won’t get the next divi payment).
Gold rises and Korean won falls
The growing tensions between North Korea and the United States are continuing to weigh on the financial markets today.
The gold price has hit a two-month high this morning, at $1,280.5 per ounce, as investors remain jittery following Donald Trump’s ‘fire and fury’ threat earlier this week.
Overnight, North Korea raised the stakes further by outlining a plan to fire a missile into the water near Guam, the US territory in the Pacific.
General Kim Rak Gyom, the head of the country’s strategic forces, declared that Trump was “bereft of reason”, in a statement that could rile the US president.
Reuters: N.KOREA SAYS U.S. PRESIDENT DONALD TRUMP'S "FIRE AND FURY" COMMENTS ARE "LOAD OF NONSENSE" -KCNA
— Steve Kopack (@SteveKopack) August 9, 2017
My colleague Julian Borger reports:
The response from Pyongyang was its most public and detailed threat to date, and evidently meant to goad the US president.
Trump had “let out a load of nonsense about ‘fire and fury’ failing to grasp the ongoing grave situation. This is extremely getting on the nerves of the infuriated Hwasong artillerymen of the KPA.”
This is causing understandable concern over the border in South Korea.
South Korea’s Kospi stock market index has fallen by 0.4% today, adding to the 1% wiped off shares on Wednesday.
The South Korean Won is also suffering, falling by 0.8% to a four-week low against the US dollar.
Although the City isn’t panicking, it is certainly watching the situation closely.
Konstantinos Anthis of ADS Securities says investors are either sitting on the side-lines or looking to sell risky assets and buy safer ones.
The escalation of the rhetoric between the US and North Korea is keeping market participants on their toes and with no fresh economic reports the price action is dictated by the headlines.
Updated
The agenda: UK trade figures
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
Today we discover whether the weak pound is helping Britain’s factories, and making a dent in her trade deficit.
The City is bracing for new UK trade figures at 9.30am; economists predict that the total gap between everything the UK imports and exports narrowed slightly in June, after jumping to £3.1bn in May.
HSBC say:
Trade volume growth appears to be moving in the right direction, with exports up 3.8% 3m/3m in May 2017, and imports growing more slowly at 2.8%. And the surveys back up anecdotal evidence that UK exports are responding to sterling weakness.
However, so far, this has done little to reduce the trade deficit in absolute terms. We expect another relatively hefty deficit in June.
New industrial production figures are also being released, and may show that manufacturing output was flat in June, month-on-month. A strong reading might raise hopes that Britain’s growth rate in the second quarter of 2017 could be revised up, from the first estimate of 0.3%.
On the corporate front, mining giant Glencore, the Co-operative Bank, estate agent Savills and sofa chain DFS are all reporting results.
The agenda:
- 9.30am BST: UK trade figures for June
- 9.30am BST: UK industrial production and manufacturing output for June
- 1pm BST: NIESR’s estimate of UK growth in May to July
- 1.30pm BST: US weekly jobless figures
Updated
