Global stock markets are continuing their rally as trade optimism spreads. With this, we say good-bye for today – we’ll be back tomorrow.
US ISM survey strengthens
Another US non-manufacturing survey, from the Institute for Supply Management, tells a slightly different story: it shows activity strengthened last month. The headline index rose to 54.5 in October from 52.6 in September.
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The new business index fell below the 50 mark that divides expansion from contraction for the first time since the survey began a decade ago, signalling a slight drop in new orders. New export orders fell for the third month running and employment also fell.
The stock rally comes despite a survey showing a worsening in business activity in the US services industries. According to the latest IHS Markit US services PMI, out just now, the headline index fell to 50.6 in October from 50.9 in September. This points to the slowest rise in business activity since February 2016.
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Wall Street has opened higher on hopes of a trade truce between the US and China.
- Dow Jones opened nearly 40 points higher, or 0.14%, to 27,500.23
- S&P 500 up 2.5 points, or 0.08%, at 3080.80
- Nasdaq up 13.4 points, or 0.16%, to 8446.62
Lloyd’s of London, the world’s oldest and biggest insurance market, was forced to act after Bloomberg reported evidence from 18 women of widespread sexual harassment ranging from inappropriate remarks to physical assault, and commissioned the survey to gauge the scale of the problems.
The organisation set up a bullying and harassment helpline in April and conducted a major survey of its own staff and thousands of brokers and underwriters working for member firms that operate in the market. The survey found that almost 500 people had either suffered or observed sexual harassment in the insurance market in the past 12 months. It concluded that “the experience of women is much less positive than it is for men”.
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The letter also says:
These issues also raise broader questions about whether firms are promoting a culture where staff feel able to speak up about poor practices or unidentified risks within their organisations, including issues relating to a firm’s financial soundness. We remind boards that they have a collective responsibility for articulating and maintaining a culture of risk awareness and prudent management of risk for their organisation.
Bank of England warns insurers over corporate culture
The Bank of England has issued a stern warning to the bosses of insurance companies, telling them to improve their corporate culture and individual behaviour following recent reports of sexual harassment and bullying.
The Bank’s Prudential Regulation Authority wrote a Dear CEO letter to general insurance firms asking for a number of measures, including discipline in underwriting strategies, amid concerns about risk-taking.
It says firms “must develop and maintain a culture where staff feel able to speak up and raise concerns, with effective mechanisms in place to support them in doing so”.
Recent public reports relating to sexual harassment and bullying within the London market are of deep concern and it is clear that some firms have more work to do to improve aspects of corporate culture and individual behaviour.
Instances of non‐financial misconduct could speak to personal integrity and may have implications for our view of the fitness and propriety of individuals within our Senior Managers and Certification Regime.
Under personal accountability rules, misconduct could lead to a fine or ban on senior managers if it happens on their watch.
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Rising hopes of a US-China trade agreement are pushing up stock markets around the world. Wall Street is set to open higher for a fifth session.
- UK’s FTSE 100 index up 26.04 points, or 0.35%, at 7395.75
- Germany’s Dax up 0.06% at 13,144.55
- France’s CAC up 0.22% at 5837.03
- Italy’s FTSE MiB up 0.39% at 23,401.21
Regarding the anticipated preliminary trade deal between the US and China, Hunter adds:
The possibility of a trade deal with China could provide a boost to exports, particularly if the Chinese step up purchases of agricultural products. That all said, we remain sceptical that a lasting deal will be reached and, in any case, the continued weakness of the global surveys suggests that further weakness in exports lies ahead.
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Andrew Hunter, senior US economist at Capital Economics, says that the 7% plunge in car exports is presumably linked to the General Motors strike that began in mid-September, which suggests exports will remain weak in October before rebounding in November.
The narrowing in the trade deficit to $52.5bn in September, from $55bn, confirms that net trade was broadly neutral for third-quarter GDP growth, although we expect it to become a renewed drag in the fourth quarter.
The narrowing in the deficit was only because a 0.9% m/m fall in exports was outpaced by a 1.7% fall in imports.
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A closer look at the detail reveals that while the overall US trade position improved in September, both imports and exports fell in the wake of rising global tariffs and a slowing global economy.
US exports dropped 0.9% to $206bn while imports fell 1.7% to $258bn. Exports of soybeans were down $1bn – one of the bargaining chips used by China in the trade dispute – while motor vehicle exports also fell by $1bn.
On another trade battle front, last month Washington announced $7.5bn of tariffs on aircraft, other industrial and agricultural products imported from the EU, in retaliation for subsidies given to the aerospace group Airbus after a World Trade Organization ruling. A wide range of products are affected such as scotch whisky, French wine and cheese and British woollen jumpers.
The EU is expected to hit back with tariffs on US goods next year in retaliation for subsidies for US aircraft maker Boeing.
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US trade deficit shrinks
The latest US trade figures are out. The US trade deficit shrank to $52.5bn in September from $55.04bn in August, as the country recorded its first petroleum surplus since 1978, of $252m.
The trade in goods gap with China narrowed by $100m to $31.6bn. Exports to China fell by $800m but imports from its rival fell by more, $1bn.
The two countries have been embroiled in a trade war since June last year, but are now edging towards a preliminary agreement.
Summary
Time for a quick recap
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Britain’s services companies are stagnated. Firms cut staffing levels as Brexit uncertainty hits new orders, according to the latest data from IHS Markit.
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Markit’s service sector PMI rose to 50.0, better than feared, but consistent with flatlining growth. Markit says it implies the economy is shrinking by 0.1%.
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UK car sales have also fallen again. New registrations dropped by 6.7% year-on-year in October, with a sharp decline in private buyers.
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Global stock markets are extending their rally, on hopes of a US-China trade deal. Beijing is pushing the White House to roll back some tariffs, in return for signing a Phase One agreement.
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French president Emmanuel Macron has called on both sides to end the dispute. Speaking at a trade expo in Shanghai, Macron warned that the global economy was suffering from the tit-for-tat tariffs imposed on US and Chinese goods.
- Shares in ride-hailing company Uber are going to fall heavily today. It posted widening losses last night, disappointing investors.
'Revenge of the left' could scupper market rally
World stock markets are still buoyant today, with European stocks at their highest level since 2015 and Wall Street at a record high.
Bond prices are near their historic highs too. Britain can borrow for a decade at just 0.7% per year, while US treasury bills are yielding 1.8% per year - compared with 3% a year ago.
Yields move inversely to prices, so these borrowing costs show that prices are steep.
But that could change, if next month’s general election or the 2020 presidential race is won by the left.
Jim Leaviss of M&G told the Reuters Global Investment Outlook Summit yesterday that a freer-spending Downing Street, or White House, could trigger a bond sell-off.
“I think my biggest thing – the thing I’d think about as a bond investor next year - is really the revenge of the left.
“But have we priced in what an Elizabeth Warren victory, or a Bernie Sanders victory, or a Jeremy Corbyn victory would mean for asset prices?”.
Leaviss runs the excellent Bond Vigilantes blog, incidentally - always worth a follow:
This is how all charts should be @bondvigilantes pic.twitter.com/ucO5T3kIE2
— Abhinav (@abhinavvr) October 30, 2019
Full story: UK service sector stagnates as Brexit fears hurt orders
Our news story on today’s services sector healthcheck is live - here’s a flavour:
Services companies suffered their seventh monthly decline in new orders this year, as Brexit uncertainty continued to take its toll on business and consumer confidence at home and abroad.
Export orders were the worst affected last month, falling at the same pace as the near record fall in September, according to IHS Markit and the Chartered Institute of Procurement and Supply (Cips).
Rising import prices also put a squeeze on firms’ profitability, prompting many to lay off workers, some of them through compulsory redundancies.
Activity across the sector was stagnant with the IHS Markit Cips purchasing managers’ index (PMI) rising slightly to 50.0 last month from September’s 49.5. A figure above 50 indicates growth.
The modest increase from September reflected reports from some firms of optimism about a resolution to the wrangling over Brexit in the new year following the election.
But with the manufacturing and construction sectors in recession, the lack of growth in the services sector meant the economy was suffering its worst period since the 2008 financial crash, said IHS Markit chief business economist Chris Williamson.
“The UK PMI surveys collectively indicated a further overall decline in private sector output in October. Contractions have now been recorded in four of the past five months, marking the worst spell since 2009 during the global financial crisis,” he said.
More here:
The Financial Times makes a good point -- Britain’s services companies has underperformed French and German rivals this year (according to the PMI surveys, anyway).
UK private sector activity stagnated at the start of the fourth quarter as the country gears up for an election campaign ahead of the December 12 poll and the planned departure from the EU https://t.co/fDphvJhpya pic.twitter.com/74ANPrq90J
— Financial Times (@FinancialTimes) November 5, 2019
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Shares in ride-hailing firm Uber are down 6% in pre-market trading, after it disappointed investors with its latest results.
Uber posted a loss of $1.16bn for the third quarter of 2019, up from $986m loss in the same quarter a year ago.
Revenue jumped 30% year-on-year to $3.81bn, from $2.94bn.
Such a sharp increase in sales ought to be encouraging, but it has consequences if your business model is loss-making.....
Uber argues that things are improving, as its adjusted EBITDA measure showed losses are narrowing.
However, that measure strips out a variety of expenses, including depreciation of assets, and $401m on “stock-based compensation”.
Russ Mould, AJ Bell Investment Director, isn’t impressed, saying:
You would have thought that WeWork’s spectacular fall from grace would act as a warning to companies about going for growth at any costs and then trying to tart up the results by focusing on self-serving, self-adjusted earnings metrics. However, Uber doesn’t appear to be getting the message, judging by its third-quarter numbers....
The loss still got worse on a year-on-year basis and the ‘adjusted EBITDA’ metric needs to be treated with caution, not least as it excludes no fewer than nine items, most of them expenses, according to the footnotes of the quarterly statement.
Steve Easterbrook, the chief executive officer of McDonald’s Corp who was dismissed over the weekend, has just quit from Walmart’s board as well.
Easterbook was forced out of the fast food chain after conducting a consensual relationship with an employee, which the board determined violated company policy.
He’s now decided to leave Walmart too, with the supermarket giant insisting it’s amicable, saying:
Easterbrook’s decision to resign was not due to any disagreement with the Company on any matter relating to its operations, policies or practices,
His departure wiped around $4bn off McDonald’s value yesterday, as investors took the news badly.
Easterbrook himself walks away with $675,000 in severance pay, plus stock awards worth more than $37m.
There’s not much market reaction to the flatlining UK service sector.
Sterling is hovering around $1.29 this morning, as traders keep to the sidelines while the general election campaign gears up.
Shares are still higher in London, with the FTSE 100 up 20 points or 0.3% at 7390.
Mining stocks are among the risers, with Glencore up 2.5% and Rio Tinto gaining 1.3%. That reflects hopes of a US-China trade war breakthough this month, and optimism that the global economy will dodge a recession.
There are also encouraging signs in the bond market. The gap between the interest rate on longer and shorter-dated US debt has widened, suggesting the markets don’t seen an imminent recession.
We survived the recession of 2019, lads. It's over, we won. https://t.co/yibMJr40Jo
— Mike Bird (@Birdyword) November 5, 2019
UK economy ends 2019 with stagnation
Today’s PMI figures suggest the UK is looking at a stagnant end to the year, says Melanie Baker, senior economist at Royal London Asset Management.
“A services PMI of 50.0 is still weak by UK standards and a composite PMI at 50.0 is consistent with close to zero growth in the UK economy.
“Actual GDP growth is likely to be stronger than that in Q3 after decent monthly output figures earlier this summer.
“It is important to note the survey period was 11-29th October, so the responses will largely have been received after the optimism generated from the Varadkar-Johnson meeting and subsequent progress towards a deal… but before MPs voted for a general election.”
Andrew Wishard of Capital Economics predicts weak growth in the final quarter of 2019.
The recovery in the services PMI in October will allay fears that the largest sector of the economy is slipping into recession. Nonetheless, the survey suggests that the risks to our forecast that GDP growth will slow to +0.2% q/q in Q4 are to the downside.
Ed Conway, economics editor of Sky News, says October’s PMI surveys paint a ‘grim’ picture of the UK economy... but the overall picture could be a little brighter.
Grim tidings from the purchasing managers index this am. All sector PMI at 49.5 in Oct. Up from Sept but, crucially, below 50, which implies a contraction. But NB these numbers aren't always a good guide to official GDP growth, which is expected to be growing again in Q3 pic.twitter.com/jZueZ0r5QM
— Ed Conway (@EdConwaySky) November 5, 2019
BBC economics editor Faisal Islam agrees....and points out that the official growth figures for Q3 2019 are released on Monday:
October all sector PMI still weak: -ve for 3 months running for first time in decade - ordinarily consistent with small contraction - but rise is expected in Q3 (ie no technical recession following Q2 fall), partly on back of public spending, stockpiling etc
— Faisal Islam (@faisalislam) November 5, 2019
GDP figures out Mon pic.twitter.com/t9StOzRewe
Sam Tombs of Pantheon Economics makes a similar point:
Your regular monthly reminder that the U.K. services PMI is a poor guide to the official GDP data: pic.twitter.com/dTDHXZoWHb
— Samuel Tombs (@samueltombs) November 5, 2019
Brexit uncertainty is having a chilling impact on Britain’s economy, warns Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply.
Here’s his take on today’s Services PMI report.
“Without any real expectation for significant change in October, the sector stuttered and stalled delivering a lifeless set of results as new business from domestic and export markets dried up and orders fell for the second month in a row.
“In terms of staff hiring, this is one of the worst service sector performances since 2011, as job creation became job cutting for the fifth time this year. Even the impending October deadline was not enough to stem the flow of hopelessness amongst service providers, as optimism remained at low levels .
“The sector’s main difficulties are largely of Brexit’s making and with another deadline comes more indecision and delay. Businesses are putting off their investments for happier times and consumers are saving their pennies in case rising costs have a more severe impact on their daily lives. Companies are waiting for a resolution by the UK Government to salvage the current situation so workflows can begin again at healthier levels.”
UK private sector shrank in October
Britain’s private sector is suffering its longest contraction since the financial crisis.
That’s according to October’s surveys of purchasing managers, which suggest the UK economy could shrink by 0.1% this quarter.
While the service sector stagnated, manufacturing shrank slightly (with a PMI of 49.6) and construction had a poor month (with a PMI of just 44.2).
That dragged the composite UK PMI below the 50-point mark for the third month running, at 49.5, up from September’s 48.8.
This is the longest negative sequence for ten-and-a-half years and signalling a further contraction in total private sector output.
Chris Williamson, Chief Business Economist at IHS Markit, explains:
Contractions have now been recorded in four of the past five months, marking the worst spell since 2009 during the global financial crisis.
“The October reading is historically consistent with GDP declining at a quarterly rate of 0.1%, similar to the pace of contraction in GDP signalled by the surveys in the third quarter.
However, as economist Rupert Seggins points out, recent official GDP data has been more upbeat than the PMI surveys recently.
UK service sector PMI of 50.0 in October indicating no change in output. All sector PMI is still slightly in contraction territory (49.5) because of the sub-50 readings for manufacturing & construction. Q3 PMIs had a bit of tension with official stats (sub-50 vs 0.3%q/q in Aug). pic.twitter.com/psrDsuVMWV
— Rupert Seggins (@Rupert_Seggins) November 5, 2019
Some service sector companies have stopped hiring new staff, while others are actively laying people off.
Today’s services PMI report explains:
Fewer incoming new contracts and sharply falling backlogs led to another reduction in workforce numbers in October, the fifth in 2019 so far.
While firms mostly linked lower headcounts to the non-replacement of voluntary leavers, some compulsory redundancies were also reported. The overall rate of job shedding eased since September, however
Updated
UK service sector is stagnating as new work declines
Newsflash: Britain’s dominant services sector stagnated last month, in another sign that the economy is subdued.
October’s UK services PMI, which tracks activity across the sector, has risen to 50.0 -- the cut-off point between expansion and contraction.
That’s up from 49.5 in September, and a little stronger than expected.
But the sector is still struggling, in the face of weak confidence and political uncertainty.
Service sector bosses reported that new business levels fell last month, leading to more job losses in the sector. New work has now declined seven times in the first ten months of 2019.
Many service companies blamed the ongoing deadlock over Britain’s exit from the EU.
Markit says:
The rate of [new business] contraction in the latest period was the fastest since April, but modest overall. Companies continued to link lower new work to uncertainty surrounding Brexit.
Uncertainty around Brexit also undermined international demand for UK-based services. New export business fell at a rate unchanged from September’s near-record pace.
Car sales have now fallen in eight of the first 10 months of 2019.
Mike Hawes, SMMT chief executive, says the market is suffering from waning confidence.
“The growth in alternatively fuelled cars is very welcome, showing increasing buyer appetite for these new technologies.
The overall market remains tough, however, with October now the year’s eighth month of decline and in need of an injection of confidence.”
UK consumers continue to shun diesel cars, with sales down 28% (to 34,666 vehicles) compared with October 2018.
Sales of petrol cars fell by 3.2%, but still made up the bulk of the market (with 89,371 sold).
Hybrid electric car sales rose by +28.9%, to 7,950. Battery electric vehicle registrations almost tripled, up +151.8% to 3,162 units.
UK car sales fall again
Newsflash: UK car sales have taken another tumble.
The Society of Motor Manufacturers and Traders reports that sales fell by 10,348 last month to 143,251, compared to 153,599 in October 2018. That’s a 6.7% slide.
It was driven by a big drop in private purchases, suggesting consumers are nervous about making major purchases.
The SMMT blamed “a tough environment for businesses and consumers as economic and political uncertainty continued to impact confidence.”
So far this year, the new car market is down -2.9% compared with the first 10 months of 2018.
The SMMT explains:
The fall reflects continued uncertainty over diesel and clean air zones, stunted economic growth and uncertainty over Brexit.
Here’s the details:
- UK new car registrations fall -6.7% in October, as consumer confidence remains weak.
- Private demand sees significant drop, down -13.2%, while fleet demand remains stable.
- Alternatively fuelled vehicles reach record 9.9% market share with 14,231 registered.
- Year-to-date market down -2.9% with 58,897 fewer cars registered than in October 2018.
More to follow....
Updated
OPEC cuts oil demand forecasts
Just in: Opec, the cartel of oil-producing nations, has cut its forecast for demand in the coming years.
It now expects oil consumption in 2023 to be 103.9 million barrels-per-day, down from 104.5m bpd a year ago.
Opec also expects demand for its own crude to fall 7% by 2024, to 32.8m bps from 35m bpd this year -- due to rising competition from the US shale industry.
OPEC has downgraded forecasts for the amount of its oil the world will need over the next few years, seeing a 7% slide by 2023.
— Helen Robertson (@HelenCRobertson) November 5, 2019
Why? U.S. shale #OOTT
OPEC has downgraded forecasts for the amount of its oil the world will need over the next few years, seeing a 7% slide by 2023.
— Helen Robertson (@HelenCRobertson) November 5, 2019
Why? U.S. shale #OOTT
Britain’s FTSE 100 has joined the rally, rising 19 points or 0.25% to 7388.
Associated British Foods is the top riser (+5%), thanks to a 4.2% jump in sales at its Primark discount fashion chain in the last year.
Primark’s profits rose by 8%, which made up for a sharp fall in profits on ABF’s sugar division (due to falling EU sugar prices and a poor crop in China).
President Macron demands end to US-China trade war
French president Emmanuel Macron has called for an end to the US-China trade war.
Speaking at the Shanghai trade expo, Macron warned that the dispute had affected the global economy, including the European Union.
“No-one wins” from a trade war, Macron warned sternly, adding that the dispute “only creates losers” and was weighing on global growth.
Lots of emphasis on reaching deals and making progress on EU-China cooperation ASAP in Macron's speech. Much at stake for the European economy.
— Carolynn Look (@carolynnlook) November 5, 2019
"Trade tensions have already hurt the global economy. We hope an agreement can be reached to ease the tensions."
Macron appeared to criticise the US’s approach, saying “unilateral action, the use of tariffs as a weapon, (and) survival of the fittest” wasn’t the way forward.
But in an even-handed approach, he also called for Chine speed up the opening of its markets (as Xi pledged today).
Xi: We must knock down walls of protectionism
President Xi Jinping has promised to crank the Chinese economy open to overseas companies, in a speech that also criticised protectionism.
Speaking at the opening of the China International Import Expo in Shanghai, Xi promised more market-opening steps were coming. He also pledged to reduce restrictions on foreign investment.
He told an audience at the trade show, including the leaders of France, Greece, Jamaica and Serbia.
“The door that China is opening will only open further and wider,”
The Expo is an opportunity for foreign companies to promote their goods, and help break into the Chinese market.
The Chinese leader also launched an attack on protectionism, saying:
[World leaders must] continue to knock down walls instead of building walls, resolutely oppose protectionism and unilateralism, (and) continuously reduce trade barriers.”
That might have triggered some eye-rolling in the audience, as Beijing isn’t exactly averse to protectionism. A recent EU report found that China has most ‘problematic’ barriers to free trade than any other country.
More gains in Asia
Trade optimism drove most Asia-Pacific markets higher today, following last night’s record highs in New York.
Tokyo led the charge, with the Nikkei index gaining 1.7%. Traders played catch-up after a Japanese holiday yesterday.
South Korea’s Kospi gained 0.65%, to a six-month closing high.
China’s CSI 300 also strengthened, jumping 0.6%. That took the index over the 4,000 point mark for the first time since April.
Introduction: US 'considering rolling back tariffs' on China
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
Global stock markets are continuing to rally today, on hopes that Washington and Beijing will sign a preliminary trade deal this month.
Optimism is rising, thanks to reports that the two sides could roll back some tariffs, to get the much-anticipated Phase One trade deal over the line.
China has pushed for recent tariffs imposed by president Trump to be removed, and US officials are apparently taking the request seriously.
This would mean rolling back the latest curbs on Chinese imports, introduced in the autumn when the trade war last escalated.
As the Financial Times explains:
According to five people briefed on the discussions, the White House is considering rolling back levies on $112bn of Chinese imports — including clothing, appliances, and flatscreen monitors — that were introduced at a 15 per cent rate on September 1.
The US move would meet a core demand from Beijing as negotiators from the world’s two largest economies work out the terms of a ceasefire to be signed in the coming weeks by Donald Trump and Xi Jinping.
US considers dropping some tariffs on China https://t.co/sD9PCqQPJO
— FT Economics (@fteconomics) November 4, 2019
With Trump eager for a ‘success’ ahead of the presidential elections, the markets are anticipating a high-profile signing ceremony soon.
As Ipek Ozkardeskaya of London Capital Group explains:
According to the latest news, the US is now debating whether to remove a part of tariffs imposed on Chinese imports on September 1st.
Such a charming move from the US would help breaking the ice between the two parties and pave the way towards a partial deal in the coming weeks. Or this is at least what investors are betting for.
However, China will have to give something in return. Pledging to buy more agricultural goods from American farmers is a start, but the US wants to see better protection for intellectual property too.
Asia-Pacific markets are rallying again today, hitting their highest levels in six months.
Last night, all three Wall Street indices closed at record highs for the first time since July, on optimism of a trade deal.
European markets hit a 21-month high yesterday, and are expected to rise further today. Auto stocks - always vulnerable to trade jitters - had a strong day.
European Opening Calls:#FTSE 7405 +0.48%#DAX 13160 +0.18%#CAC 5841 +0.28%#MIB 23382 +0.30%#IBEX 9431 +0.15%#STOXX 3675 +0.27%#SA40 50705 +0.06%
— IGSquawk (@IGSquawk) November 5, 2019
But is the rally built on firm foundations, given global growth has slowed this year and many companies missed expectations or trimmed their outlook recently?
Valuations certainly look quite high at the moment.
As Paul Donovan of UBS Wealth Management puts it, there is ‘optimism unbound’ right now:
Equities are back to believing that all is for the best in this best of all possible worlds.
Also coming up today
We’ll find out how Britain’s services sector coped last month, in the run-up to the October 31st Brexit deadline that never was. Economists predict a small drop in activity.
Yesterday, we learned that UK construction output dropped quite steeply, as uncertainty continues to bite.
America’s service sector is forecast to have done better, with a small rise in activity.
The agenda
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9.30am GMT: UK service sector PMI for October - expected to rise to 49.7, from 49.5, showing a small contraction
- 1.30pm GMT: US trade balance for September - expected to rise to 51.1, from 51.0, showing modest growth
- 3pm GMT: US service sector PMI for October
Updated
