European markets close lower
Investors were cautious as Donald Trump made a number of moves in his first day in office as US president, including plans to renegotiate the free trade agreement with Canada and Mexico and withdraw from the Trans-Pacific Partnership. He also threatened massive border taxes on companies moving abroad and shipping goods to the US. With the dollar weakening on nervousness about Trump’s protectionism and fears of a trade war, European markets were on the back foot, while Wall Street also went into decline. Jasper Lawler, senior market analyst at London Capital Group, said:
European stocks dropped whilst Wall Street opened lower on the first full working day with Donald Trump as US President. Attempts to breakout into new highs for the year have been temporarily shelved after Donald Trump opted for a protectionist, anti-establishment inauguration address. The tone at the inauguration was very different to the acceptance speech that preceded the latest rally in equities and the US dollar.
Perhaps the market was a little overdone to the upside anyway, but it isn’t hard to imagine a more positive reaction should the speech have been more conciliatory. Still, there is no clear sense of capitulation in markets yet. Investors are still willing to give Donald Trump the benefit of the doubt.
A little protectionism can be tolerated if it comes with lower taxes and lighter-touch regulation. In a series of statements on Monday, Trump generated mixed feelings about the direction of future policy. The new US President said he believes he can “cut regulations by 75%”, “cut taxes massively” for the middle class while imposing a “very major border tax”.
The final scores in Europe showed:
- The FTSE 100 finished down 47.26 points or 0.66% at 7151.18
- Germany’s Dax dropped 0.73% to 11,545.75
- France’s Cac closed down 0.6% at 4821.41
On Wall Street, the Dow Jones Industrial Average is currently down 60 points or 0.31% at 19,767. The 20,000 level, within tantalising reach just a couple of weeks ago, is receding fast.
Meanwhile the pound is up 0.8% against a weakening dollar at $1.2476, still at a five week high. The prospect of the UK government losing the Supreme Court case on Brexit, with judgement due on Tuesday, is also giving some support to sterling.
On that note, it’s time to close for the day. Thanks for all your comments, and we’ll be back tomorrow.
The weakness in the dollar and hopes that Donald Trump’s infrastructure plans will boost demand are helping to buoy up metal prices, with copper up 0.8% on the London Metal Exchange.
In turn that has lifted mining groups, with Antofagasta rising up nearly 4% and Anglo American adding 1.5%. Precious metal miners such as Randgold Resources and Fresnillo are also in demand as investors seek havens amid the uncertainty over Trump’s presidency.
The US is set to renogiate the free trade agreement with Canada and Mexico, and our latest report is here:
US markets could be set for further falls as the initial Trump boost fades and a possible recession looms, reckons Capital Economics. The consultancy’s John Higgins said:
We think that the S&P 500 will only rise a little bit further over the next couple of years and then probably tumble as the US economy takes a turn for the worse.
Admittedly, Trump’s election victory gave the index some renewed impetus. But the euphoria has died down and it is now not much higher than at the start of 2017. Indeed, the big picture is that since trebling between its post-financial crisis trough in 2009 and the end of 2014, the S&P 500 has traded in a fairly narrow range.
We doubt that this pattern is set to change in the first couple of years of Trump’s presidency. Indeed, we forecast that the index will end this year and next at 2,300 and 2,400, respectively, which would be small gains from its current level of around 2,270.
Our caution is related to the stage of the economic cycle. We have reached a point where the unemployment rate in the US is close to its “natural” level. If, as we suspect, the rate falls below this level in the early part of Trump’s presidency, the likely outcome is a squeeze on domestic profits as workers benefit from higher wages. Ongoing share count dilution (via buy-backs) and faster growth in profits from the rest of the world could conceivably take up some of the slack. But the latter seems doubtful if, as we anticipate, the dollar strengthens further in response to tighter-than-expected Fed policy.
What’s more, investors are unlikely to drive the valuation of the stock market up to an even higher level. In the past, the price/earnings multiple of the S&P 500 has tended to track a sideways path when the unemployment rate has fallen well below its natural level.
As a result, the S&P 500 has only tended to edge up on the eight occasions since 1950 when this has happened. The average gain in the index has been roughly 4% a year, about half its average over the period.
Things are likely to get bleaker for investors as the second half of Trump’s first term as president comes around. The boost to economic growth from fiscal stimulus is likely to have faded by that point and monetary policy is likely to be a lot tighter than it is now. The risk of a recession will therefore be high.
Major corrections in the stock markets often occur about three to six months before the onset of an economic downturn. The upshot is that we think that the next big move in the S&P 500 will be down, perhaps in 2019. A fall of 20% or more seems plausible, especially as the valuation of the index is on the high side.
On Wall Street the slide in the Dow Jones Industrial Average has accelerated as investors continue to express concern about the protectionist policies promoted by the new US president.
Donald Trump’s meeting with US chief executives seems to have emphasised these worries. Joshua Mahony, market analyst at IG, said:
Donald Trump has wasted little time in his new role, choosing to host on open meeting with business leaders in front of the press. This meeting was clearly as much about the message it sends out to other businesses as it was about the CEOs in the room.
Trump’s promise of lower taxes and better incentives for firms to remain in the US should have provided a boost for US stocks, yet with the likes of the Dow trading in the red, it is clear that markets instead focused on the protectionist aspects of the new president’s plans. Trump’s promise for massive import taxes on products produced abroad and shipped to the US strikes a dangerous tone, threatening to spark a trade war, hard on the heels of the currency wars of the past few years.
If today teaches us anything, it is that Trump shows little signs of slowing down, with the next four years promising to be hugely unpredictable for traders who deal with US securities. Given today’s 45 day low for the dollar index, it seems the Trump boost seems to have run its course, for now.
The Dow is currently down 75 points or 0.38%.
Updated
Still with the confidence figures, ING economist Bert Colijn said:
Improvements in the job market seem to be outweighing concerns about political volatility among consumers for the moment. Expectations of unemployment have declined significantly over recent months and expectations of the financial situation of households have improved. While 2017 could be a year full of political risk, consumers have started it full of confidence. This is a positive sign for domestic demand growth in the first quarter, which is why we expect consumer spending to accelerate in the first quarter of 2017.
Consumers do seem to be defying some of the more negative factors influencing confidence. Besides continued high political risk, this month gasoline prices reached the highest level since August 2015, which shows that the oil price recovery continues to work through to the headline inflation numbers in January. Eurozone stock prices have also stagnated at the beginning of the year, as the Trump-rally calmed ahead of the inauguration. Higher inflation and concerns about geopolitics could impact confidence later in the quarter as gasoline prices rise further and major Europeans elections come closer, but for now consumers remain optimistic.
The European consumer confidence figures are encouraging but the outlook may not be so positive, says Howard Archer, chief economist at IHS Markit. He said:
First survey evidence for 2017 for the Eurozone economy is encouraging – as consumer confidence rose for a fifth month running in January to reach a 21-month high. Furthermore, consumer confidence is now substantially along long-term norms. Consumers across the Eurozone currently seeming to be focusing on recent largely decent economic news and improved job markets; and, for now at least, brushing off political uncertainties.
January’s further strengthening in consumer confidence buoys hopes that the Eurozone economy can get off to a decent start to 2017 after seemingly improving in the fourth quarter of 2016. We believe that Eurozone GDP growth picked up to at least 0.4% quarter-on-quarter in the fourth quarter of 2016, and could very well have reached 0.5% quarter-on-quarter. This would be up from 0.3% quarter-on-quarter in both the third and second quarters.
However, the fundamentals for Eurozone consumers could well soften overall during the coming months – particularly through higher inflation eating into purchasing power.
Much will likely depend on how well Eurozone labour markets do over the coming months.
Furthermore, it remains highly possible that consumer confidence in the Eurozone will be increasingly pressurized by increasing political uncertainty over the coming months. 2017 will see general elections in France, Germany and the Netherlands, likely political problems in Italy and Spain, and the United Kingdom formally launching the process of leaving the European Union. The UK’s Brexit vote last June and November’s election of Donald Trump as US President fuels concern over potential political shocks in the Eurozone.
European consumer confidence improves
Over in Europe, consumer confidence improved in January to a 21 month high, but not by as much as expected.
According to the European Commission, consumer confidence in the eurozone rose by 0.2 points to -4.9, compared to expectations of a figure of -4.8. In the wider European Union it improved 0.3 points to -4.3 from December.
Updated
Wall Street edges lower
With the concerns about Donald Trump’s protectionist strategy heightened by the new President’s inauguration speech hitting the dollar and prompting investors to seek havens, US markets have edged lower at the open.
The Dow Jones Industrial Average has dipped 13 points or 0.06% while the S&P 500 opened down 0.17% and the Nasdaq Composite 0.145.
Meanwhile Trump has been telling a number of US chief executives that companies will get fast approval to build in the US, but those that move abroad will face major border taxes on goods coming into the US.
BREAKING: Executives from Whirlpool, Under Armour, Tesla, Lockheed Martin, Johnson & Johnson and more attend Trump meeting on manufacturing
— Reuters Business (@ReutersBiz) January 23, 2017
BREAKING: Trump says he is going to cut taxes massively for middle class and companies
— Reuters Business (@ReutersBiz) January 23, 2017
MORE: Trump tells manufacturing executives that companies that move abroad will face major border tax on products coming into U.S.
— Reuters Business (@ReutersBiz) January 23, 2017
The UK Supreme Court is due to make its decision on Tuesday on whether MPs are entitled to have a vote on triggering Article 50, the process of leaving the EU. Whichever way the ruling goes, the pound and the markets are bound to be affected. Naeem Aslam, chief market analyst at Think Markets UK, said:
Ahead of tomorrow’s Supreme Court’s decision, both FTSE and sterling are the major focus for investors. If the Supreme court provides a decision which is against the government’s unilateral power (triggering the article 50), we could see sterling moving higher. The reason will be that parliament will have much more to say in triggering Article 50 and most importantly, it fades the chances of Scotland prompting another referendum. Scotland can no longer play the card that the Brexit is against their will if the vote comes to the parliament. As for the FTSE, higher sterling could take some more wind out of the index.
On the flip side, if the Supreme court says that Theresa May does have a unilateral decision in activating article 50, we could see the sterling falling. Traders will perceive that Theresa May is going to achieve her “clean” Brexit without major hurdles. For the FTSE 100, lower sterling has provided ammunition for higher moves.
Lunchtime recap
Time for a quick catch-up, and the latest reaction to today’s developments.
Worries over Donald Trump’s early moves as president are driving the markets today, weakening the US dollar as investors fret about a new wave of protectionism.
The pound has hit its highest level since mid-December, currently up almost one cent at $1.246. The euro has also crept higher, to $1.0735, as the US currency fell on the FX markets.
FXTM Research Analyst Lukman Otunuga blames uncertainty for the moves.
Global stocks traded lower on Monday as the Trump fueled uncertainties, rising political risks, and overall market jitters dented investors risk appetite.
Asian shares failed to maintain gains while the risk-off sentiment sent European markets into the red territory.
Fears that the new US president could spark trade wars with China, or with countries close to home, have dominated today.
These concerns got another bump after US media reported that Trump will sign an executive order today to start the renegotiation of NAFTA.
Analysts at Dutch bank ING explain why traders are edgy:
While President Trump’s ‘too strong’ dollar comment and combative inaugural address has taken some of the steam out of the greenback’s rally, we remain wary that dollar strength could be the ultimate by-product of the new President’s ‘America First’ policy stance. Indeed, the updated White House pages show that 25 million new jobs and 4% GDP growth remain the economic pledges of the Trump administration. With a US economy already close to full employment, it is difficult not to see Trump’s fiscal plans generating sufficient inflationary pressures to drive US yields and the dollar higher.
But equally, investors are placing greater focus on future US trade and foreign policy. Naturally the market may be bracing itself for President Trump to formally name China a currency manipulator. In practice, this would spark bilateral negotiations rather than any immediate tariffs but presumably the market wouldn’t take too kindly to this.
That has weighed on the London stock market; the FTSE 100 is currently down 42 points at 7156, meaning its early 2017 gains have been wiped out.
The City’s new year optimism has rather fizzled out, as Conner Campbell of SpreadEx says:
Having hit a fresh all-time high this time last Monday, an aggressively negative series of sessions last week, largely inspired by the pound’s gains following Theresa May’s Brexit speeches, has effectively wiped away the remarkable gains it managed in the first fortnight of 2017.
The FTSE still has a way to go before it dips under the key 7000 level; however, the index’s rampant optimism does seem to have come to an end in conjunction with the pound beginning to peek its head above the parapet after a month or so of suffering.
Trump anxiety, and the weak dollar, also helped to push the gold price up to a two-month high, as part of a general move to safer assets.
US media are reporting that Donald Trump is expected to sign an executive order today that would start the process of renegotiating the North American Free Trade Agreement (the free trade bloc of the US, Canada and Mexico).
BREAKING: Trump to sign orders as early as today to renegotiate NAFTA and pull out of TPP - @NBCNews https://t.co/wDzeDfOMZ0
— CNBC Now (@CNBCnow) January 23, 2017
This shouldn’t come as a shock to those paying attention to the US election, as Paul McNamara of investment group GAM points out:
Trump Executive Order to renegotiate NAFTA confuses investors who've spent last year under a rock.
— Paul McNamara (@M_PaulMcNamara) January 23, 2017
Meanwhile in Europe, protesting farmers have been spraying powdered milk at the EU council headquarters in Brussels.
The demonstration, organised by the European Milk Board, is meant to put pressure on ministers to help support milk powder prices.
According to news service Agriland, the farmers want the EU to agree not to release stocks from the EU’s milk powder mountain. That would allow them to cut production and push up prices.
The EMB says:
“The dairy market is still stuck in a crisis. Voluntary production cuts might have led to a rise in prices, but the sale of milk powder from EU intervention stocks would, once again, put the market under pressure.”
“We need a permanent crisis instrument that prevents surpluses on the dairy market and leads to long-term stability,” according to the board.
AFP’s Marine Laouchez of AFP filmed a videoclip of the protests:
Producteurs en colère : Déversement de lait en poudre sur le Conseil européen (vidéo) #AGRIFISH #AFP pic.twitter.com/PneWku7aai
— Marine Laouchez (@marilcz) January 23, 2017
Draghi urges stability as he collects Cavour prize
Newsflash: Mario Draghi is now collecting the 2016 Camillo Cavour prize, awarded for his work strengthening Italy.
And the ECB president is talking about the instability currently in play in Italy and beyond, as he compares the situation today to the mid-19th century, when Camillo Benso, Count of Cavour, helped unify Italy.
#ECB DRAGHI SAYS THERE IS WIDESPREAD INSTABILITY IN ITALY, GLOBALLY - BBG
— Christophe Barraud (@C_Barraud) January 23, 2017
His speech is on the ECB website, in Italian -- here’s what Google Translate makes of it....
Cavour acted in a European context suddenly destabilized by the 1848 revolutions that had disrupted the balance of power established by the Congress of Vienna after the fall of Napoleon. It was a period of turbulent transition, in which for the protagonists of European politics opened large joint opportunities to large risks.
Today we are again in a historical phase in which Europe is moving, after the dissolution of the Soviet bloc, the reunification of Germany, the effects of the sovereign debt crisis in the euro area, the UK via exit ‘ European Union, the geopolitical tensions in Eastern Europe.
In different words, now as then we could say that it is looking for a new stability.
#Draghi: "International cooperation is the only way to solve problems that national states have long been unable to handle on their own" pic.twitter.com/drgkGAu2Rm
— Maxime Sbaihi (@MxSba) January 23, 2017
Draghi ringrazia figlio di assessore m5s per parole di apprezzamento!!
— Marco Zatterin (@straneuropa) January 23, 2017
(Vedi tweet precedente)@LaStampa @alexbarbera @ecb pic.twitter.com/L3BkT00G97
ECB president Mario Draghi has just been sighted in Turin, where he’ll be giving a speech at a prize-giving ceremony (in memory of Italian statesman Camillo Benso, Count of Cavour)
Draghi on the footsteps of Cavour
— Marco Zatterin (@straneuropa) January 23, 2017
Santena@LaStampa @alexbarbera @ecb pic.twitter.com/jSLObmEm9J
We’ll watch out for any monetary policy signals from Draghi (who left interest rates unchanged last week)
Updated
The eurozone’s total national debt has shrunk to its smallest level in four years, when measured against its total economy.
New figures from Eurostat show that the euro area national debt dropped to 90.1% of GDP in the July-September 2016 quarter, almost a whole percentage point lower than the previous three months.
That means that Europe’s economy has been growing at a slightly faster rate than its borrowing has expanded:
Euro area government debt down to 90.1% of GDP at end Q3 2016 (91.2% in Q2 2016) #Eurostat https://t.co/FzbFl457gf pic.twitter.com/bdL0nasLPe
— EU_Eurostat (@EU_Eurostat) January 23, 2017
Euro area seasonally adjusted government deficit up to 1.7% of GDP in Q3 2016 #Eurostat https://t.co/iQnklRKsA9 pic.twitter.com/0153NzNa4X
— EU_Eurostat (@EU_Eurostat) January 23, 2017
Today’s selloff means the FTSE 100 has lost virtually all the gains it made this year.
The rally that began after the shock US election result in early November appears to have petered out, as investors face the reality of a Trump presidency.
Chris Beauchamp, chief market analyst at IG, says there is a gloomy mood in the markets, with the FTSE 100 currently down 41 points at 7156.
The week has started on a bearish note, with the FTSE 100 falling over 40 points in early trading. The index has lost around 3% since its peak earlier in January, although it has held the breakout line of 7130 that marked its previous high.
The steady deterioration in risk appetite over the past few days nicely bookends the post-election period, which began with such furious buying of stocks. Disappointment has set in, but it has not yet turned to disillusionment.
This chart, from the Wall Street Journal, show how market volatility has risen while money flowed out of the markets last week:
Trump trade over? Investors are turning more cautious, as President Donald Trump takes office https://t.co/IKwmCjp762 pic.twitter.com/ERL4TaaveH
— Holger Zschaepitz (@Schuldensuehner) January 23, 2017
City investors are disappointed that Trump’s inauguration speech contained little detail on fiscal policy, tax cuts and infrastructure spending.
As Kit Juckes of French Bank Societe Generale puts it:
Instead, the message was combative, protectionist and isolationist, while the media focus was on the size of crowds and the women’s movement marches in the US and elsewhere.
Here’s our take on Crowdgate:
Shares fall in London, and beyond
London’s stock market has opened in the red.
The FTSE 100 has dropped by 64 points, or 0.9%, to 7134 points. That’s partly due to the strength of the pound (which will hurt exporters, and make UK shares more expensive for foreign investors to buy).
Financial stocks are leading the selloff, with Admiral Group down 2.5%, RBS down 2.2% and Barclays losing 2%.
Other European markets are also falling, with anxiety over Trump to the fore.
Neil Wilson of ETX Capital says the markets are being driven by the weaker dollar this morning.
So far the new president has stoked protectionism but offered little detail on the good stuff – pro-growth infrastructure spending, stimulus etc. That’s ensuring the dollar starts the week on the back foot, trading at its weakest since early December.
Gold is trading at a two-month high as safe haven assets are bid.
We’ll be looking for more details on spending and growth plans in the coming days, which could revive the long dollar trade.
The dollar is down 0.5% against other currencies this morning.
RBC Capital Markets blame:
...the lack of economic policy detail in President Trump’s inauguration speech coupled with concerns over his potential protectionist stance.
Updated
Pound hits five-week high as dollar slides
Donald Trump’s protectionist rhetoric is driving down the US dollar this morning.
The greenback is in retreat against most major currencies, sending the British pound up 0.75 of a cent to $1.245. That’s its highest level since 19 December.
Ilya Spivak of Daily FX reports that traders are anxious, piling into US debt and the Japanese yen, and gold of course.
US Dollar lower as gold, yen and UST 10yr futures rise in tandem. Looks like risk aversion to open the trading week.
— Ilya Spivak (@IlyaSpivak) January 23, 2017
The euro is also gaining ground, up 0.35% at $1.074 this morning.
Trump’s unpopularity, unpredictability and unyielding determination to put US interests first are all worrying for traders, who have the unenviable task of trying to guess his next move.
Kathleen Brooks of City Index say investors will be watching Trump’s first week as president closely:
After the “joyless rant” of Trump’s inauguration speech on Friday (to paraphrase Simon Schama, writing in the FT at the weekend), the world is watching to see what will be included in the rush of executive orders that are forecast to come in the coming days.
This will hopefully give us an idea if Trump has a coherent set of views that could be considered a plausible economic policy.
If his team use “alternative facts” about the size of the much-anticipated infrastructure spending programme, for instance, or if he walks away from rolling back years of financial market regulation, two key drivers of the stock market rally since Trump’s election in November, then the stock market rally could whither and die.
Updated
The agenda: Trump fears drive gold to two-month high
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
The markets are starting the week in a nervous mood, as Donald Trump gets his feet under the Oval Office desk.
Gold has hit a two-month high in early trading, with investors anxious about the new president’s combative inauguration speech on Friday.
Trump’s vow to put America First means more worries about protectionism, and potential trade wars.
Bullion is changing hands at $1,217 per ounce, the highest since late November, in a sign that investors are looking for safe assets.
Many City experts are predicting that trading will be edgy in the next few months, as Reuters explains:
With the lack of a clear policy direction from Trump, the market movement is a sign that risk aversion is back on the table, OCBC analyst Barnabas Gan said.
The market could witness volatility into the first 100 days of the Trump administration, he added.
Shares in Europe are expected to drop too, as local currencies gain against the US dollar.
Good morning from Berlin. Asia stock markets start mixed to the week as Trump’s America First speech weighing. Dollar drops while Gold rises pic.twitter.com/cp7LiweWQ4
— Holger Zschaepitz (@Schuldensuehner) January 23, 2017
Also coming up
The economic calendar is a little sparse today, but there are a few things to watch out for:
- 11.30am GMT: ECB President Mario Draghi will deliver a speech on the occasion of the awarding of the Premio Camillo Cavour organised by Fondazione Camillo Cavour in Turin
- 1.15pm GMT: ECB Board Member Peter Praet delivers a speech at “European Pillar of Social Rights Conference”, in Brussels
- 3pm: The EC’s monthly Eurozone consumer confidence survey
Updated
