Closing summary: Investors in retreat following ill winds on trade
Wall Street has caught cold from a chilly atmosphere on European bourses, with all auguries suggesting that the US-China trade relationship continues to be the biggest threat to the global recovery.
European Central Bank vice-president Luis de Guindos warned that a trade war between the world’s two largest economies remains the biggest risk to the world economy.
If that were to trigger a global slowdown it could also cause financial instability, the ECB warned.
The latest flurry of nerves on global stock markets had an unusual source: some newspaper columns about rare earth minerals. China dominates supply of the useful minerals, and could be seeking to use that leverage. You can read more on that here:
The FTSE 100 had lost 1.5% at the time of writing, while the more UK-focused FTSE 250 lost 1.1%.
Tesco was the biggest faller of London’s blue-chip stocks, down by 5.7%, after Kantar data suggested its grip on the grocery sector is slipping.
France’s Cac 40 was the biggest loser of the major European indices, falling by 2%. Germany’s Dax lost 1.5%.
In the UK, the sound and fury of the Conservative leadership contest is taking up attention, although since Theresa May announced her plan to resign the contenders are still in the early stages of their campaigns.
One of those contenders, Boris Johnson, looks like he will end up in court before then, to answer allegations of misconduct in a private prosecution.
Thanks for reading, and please do join me tomorrow for more coverage of markets, corporate news, and economics. JJ
Stock markets around the world are sending a message to Donald Trump: end your trade war with China or face the nightmare scenario of running for a second term in the White House with the economy in serious trouble.
Trump seriously miscalculated if he thought Xi Jinping would quickly cave in to US pressure, writes the Guardian’s Larry Elliott.
On the contrary, Beijing’s hint that it will restrict exports of the rare-earth metals used in advanced electronics suggests it is digging in for a long battle.
You can read more here:
Dow Jones industrial average opens near four-month low amid trade tensions
Wall Street’s major indices have fallen as trading opened amid concerns that China could step up its trade dispute with the US.
The S&P 500 fell by 0.63% at the open to 2,784 points, a two-month low. The Dow Jones industrial average slumped to a near four-month low, down 0.69% to 25,173 points.
The tech-heavy Nasdaq fell by 0.69% to 7,555 points.
With a few minutes to go to the Wall Street opening bell, it appears that US markets will follow Europe down.
Futures prices for the S&P 500 suggest shares will fall by 0.6% as trading begins. Dow Jones industrial average futures suggest a 0.7% fall for those blue-chip stocks.
An update on Boeing, which is still in the middle of a crisis following the grounding of its 737 Max aircraft. The 737 Max was grounded because its safety features were implicated in two fatal crashes.
Reuters reports from Seoul, where the airline industry is currently meeting:
The International Air Transport Association (IATA) expects it could take until August before the Boeing Co 737 MAX returns to service, the airline group’s head said on Wednesday, adding that the final say on the timing rested with regulators.
“We do not expect something before 10 to 12 weeks in re-entry into service,” IATA director general Alexandre de Juniac told reporters in Seoul. “But it is not our hands. That is in the hands of regulators.”
Pickering now puts the likelihood of a hard Brexit at 35%, up from 25%, because a Brexit-backing politician is odds-on to replace Theresa May as prime minister.
According to the bookmakers’ implied odds, the next PM is likely to be a Brexiteer: Boris Johnson (38% chance), Michael Gove (18%), or Dominic Raab (18%). On its own, this would raise the hard Brexit risk.
Raab is the “one to watch”, says Pickering, given his hardline stance, while the others are more pragmatic.
However, Costas Milas, professor of finance at the University of Liverpool, has found an interesting correlation: searches for Boris Johnson on Google move in tandem with sterling-dollar volatility.
In an article on the Conversation, Milas writes that the reaction to Johnson’s comments on Brexit means he has a role to play in future volatility of the pound.
Given the considerable likelihood of him becoming the next UK prime minister, it would definitely be wise for Boris Johnson to think carefully before making statements that have the potential to move financial assets. The last thing the UK needs is a prime minister who has the potential to trigger considerable instability in its currency and therefore undermine the willingness of international investors to cast a vote of confidence in its already Brexit-battered economy.
Sterling is essentially flat against the US dollar and the euro for today, but it remains near levels not seen since the start of the year because of traders’ perceptions of Brexit risks.
With the dust settled (in the UK at least) on European parliament elections which were painful for both major parties, the chances of a compromise which would avoid a no-deal Brexit have lessened, according to Kallum Pickering, senior economist at Berenberg.
After haemorrhaging support to the Brexit Party, the Conservatives look set to harden their stance on Brexit as the party searches for a new leader and prime minister. The Labour Party, which suffered big losses to the pro-EU Liberal Democrats, looks set to fully back a second EU referendum shortly. Strong support for the Scottish National Party has renewed its drive for a second Scottish referendum.
Altogether, this lowers the odds of a compromise semi-soft or soft Brexit while increasing the likelihood of the more extreme outcomes. The latest sterling selloff reflects the heightened political uncertainty and rising tail risks.
More professions should be included on a list of jobs in which the UK has a shortage, according to an independent body tasked with examining the British immigration system.
Vets, web designers and architects should be included on the shortage occupations list, which would make it easier for people in those professions to gain a visa, the Migration Advisory Committee (MAC) said today.
The MAC’s suggestions would mean that 9% of the labour market is on the list, up from 1% at the moment. Other changes would include widening the doctors, artists and civil engineers on the list.
The government is still technically committed to reducing net migration to the UK to the “tens of thousands” (even if some Tory leadership contenders want to ditch the target). In the meantime the government has asked the MAC to try to work out the ideal immigration policy.
Polls carried out on behalf of Lord Ashcroft on referendum day found restricting immigration was the second most common reason for voting leave in the EU referendum (behind the desire to assert the UK’s sovereignty).
Yet business groups are, for the most part, in favour of keeping a more open immigration policy. Tej Parikh, senior economist at the Institute of Directors, said:
In the current context of an extremely tight labour market vacancies are often going unfilled, particularly in STEM [science, technology, engineering and mathematics] areas. This is holding firms back from growing even faster, to the benefit of the UK economy.
It is crucial that migration policy takes into account economic realities. Widening the list will help relieve some of the strains businesses face in searching for talent.
The mayors of Greater Manchester and Liverpool city region have called on the transport secretary to terminate the Northern rail franchise after a year of sustained misery for passengers.
Speaking on behalf of the 4.3 million people they represent, Andy Burnham and Steve Rotheram made the demand 12 months on from last May’s timetable chaos, writes the Guardian’s Helen Pidd.
They complain of a litany of failures, with nearly a fifth of all services arriving late following years of underinvestment.
In a separate (but perhaps emblematic) move, the Department for Transport yesterday announced a plan to use the infamous Pacer trains currently in service as, er, village halls.
Read more here:
European stock markets are all still very much in the red just after the middle of the trading day in London.
The FTSE 100 is down by 1.4%, while the mid-cap FTSE 250 has lost 1%.
Regulator bans former broker involved in Libor rigging scandal
The City regulator has banned a former trader who was cleared of rigging the Libor interest rate, saying he acted dishonestly and lacked integrity.
Terry Farr arranged nine “wash trades” with no commercial purpose in a bid to gain brokerage payments between 19 September 2008 and 25 August 2009, the Financial Conduct Authority found.
Farr was a broker on the Japanese yen desk at Martins, a relatively small brokerage which arranged transactions of currencies and derivatives between financial institutions. He was acquitted of participating in fixing Libor (the London Interbank Offered Rate) in January 2016.
The wash trades meant that Martins received unwarranted brokerage of £258,151, the FCA said, increasing his bonus pool.
Mark Steward, executive director of enforcement and market oversight at the FCA, said:
There was no legitimate reason for Mr Farr to make these trades and his actions were motivated by greed. His actions mean he has no place in financial services.
Today’s ban reflects our commitment to making sure that people working in financial services act with integrity.
Summary: Investors take fright as European Central Bank adds warning on trade
Stock markets across Europe have fallen on Wednesday morning amid concerns over global growth. Economists are eyeing the trade dispute between the US and China as the most prominent threat to the long-running expansion.
The European Central Bank warned that the trade war could harm the global economy, and that a slowdown could be the trigger to a bout of financial instability.
ECB vice-president Luis De Guindos this morning told reporters that “a trade war is the main risk to the economy globally.”
The ECB report said:
Weaker than expected growth and a possible escalation of trade tensions could trigger further falls in asset prices.
The dispute over tariffs and trade between the US and China, sparked by US President Donald Trump, has unsettled investors through fears of higher import taxes that could slow trade and growth.
In other news:
- The ECB also sent a warning to Italy that its debt may be unsustainable.
- German unemployment rose for the first time since 2013.
- Tesco and Sainsbury’s have both lost market share, according to Kantar.
- Oil prices have fallen amid concerns over demand.
Here is some interesting news in the battle for the Conservative party leadership – and hence to be the UK’s next prime minister: Boris Johnson will have to appear in court to face allegations of misconduct.
The summons to court follows a crowdfunded move to launch a private prosecution of the MP, who is currently the frontrunner in the Tory leadership contest, writes the Guardian’s Ben Quinn.
Johnson lied and engaged in criminal conduct when he repeatedly claimed during the 2016 EU referendum that the UK sent £350m a week to Brussels, lawyers for Marcus Ball, a 29-year-old businessman who has launched the prosecution bid, told a court last week.
Read more here:
The risk-off attitude among investors is making its mark on oil markets as well.
Futures for Brent crude, the North Sea benchmark, are down by 2% today to below $69 per barrel. It earlier hit lows of $68.44.
Futures for the US benchmark, West Texas Intermediate, fell by 2.2% to $57.83 per barrel.
Prices have rallied steadily from around $50 per barrel at Christmas to almost $75 in April, but have retreated in the face of concerns over demand as investors await the inevitable slowdown in global growth.
Back in the markets, the FTSE 100 has now lost more than 100 points for the day, or 1.5%. It’s a fairly broad-based sell-off across sectors, with Ocado now the biggest faller, down 5.4% so far.
Every major European index has lost well over 1% so far. France’s Cac 40 is down by 1.8%, Germany’s Dax is down by 1.4%, and Italy’s FTSE MIB has lost 1.5%.
On currency markets, sterling has dipped by 0.14% against the US dollar and 0.1% against the euro. The US dollar index, based on a trade-weighted basket of currencies, is up by 0.1% overall.
There is also an interesting chapter on the climate crisis in the European Central Bank’s financial stability review.
Central banks have become increasingly vocal on the dangers posed by global heating – albeit couched in language about exposures to financial risks.
The report said:
While significant macroeconomic impacts from climate change may occur in the more distant future, some impacts are already beginning to be felt.
There are “key gaps” in data on the financial sector’s exposure to climate risks, the ECB warned. However, what data there is appears to show an increasing toll from the climate crisis in recent years.
Risks to the eurozone from a no-deal Brexit – still a possibility after 31 October – are “manageable”, but there is the small possibility that disruption could coincide with another global shock with damaging consequences, the ECB says.
The financial stability review says:
There remain tail macro-financial risks whereby a no-deal Brexit interacts with other global shocks, in an environment where risks to the euro area growth outlook are tilted to the downside.
If such a scenario occurs, the impact would likely be concentrated on particular countries, such as those with significant ties to the UK.
Such a shock could dent eurozone GDP growth, along with an “even more significant macroeconomic shock in the UK”.
Downside risks to the growth outlook “appear prominent”, the ECB warns, and Italy is particularly in the crosshairs.
“Country-specific debt sustainability concerns” are a problem, the central bank warns. In case you don’t know which country, they provide a handy chart with a large “IT” in the corner:
European Central Bank warns financial stability threatened by downturn
Slower economic growth could spark greater financial market volatility and threaten the eurozone’s financial stability, the European Central Bank warned today.
Economists across the world are looking nervously at indicators which show slowing growth in some of the largest economies. That has contributed to investor anxiety that the long recovery from the financial crisis may be coming to an end.
“If downside risks to the growth outlook were to materialise, risks to financial stability may arise,” said Luis de Guindos, vice-president of the ECB. “The growth outlook is central to all the main risks to financial stability.”
The report also said that “persistent downside risks to growth reinforce the need to strengthen balance sheets of highly indebted firms and governments” – a possible swipe at Italy, where deputy prime minister Matteo Salvini has suggested running larger budget deficits.
The EU has limits on the size of deficits which member states may run, but Italy’s government has grated against restrictions in the aftermath of a strong showing for Salvini’s far-right League party in the European parliamentary elections.
Quite a striking graph here from the German unemployment data, published earlier.
The unemployment rate in the EU’s largest economy rose to 5%, slightly above the consensus expectation of 4.9%. The below graph, from Pantheon Macroeconomics’ chief Eurozone economist, Claus Vistesen, shows the monthly change in unemployment.
It isn’t quite as bad as it looks because of a statistical reclassification of some workers, says Vistesen, but the trend is for rising unemployment.
Unemployment claims, corrected for this one-off hit, rose by 10-to-15K. This isn’t surprising. German GDP growth has slowed sharply in recent quarters, the [purchasing managers’ indices] have been warning about falling employment in manufacturing and the IAB’s unemployment index has deteriorated.
We think today’s report could well be the beginning of a more sustained increase in German jobless claims.
The solid German employment picture will not spontaneously combust this year, but the rate of improvement will deteriorate significantly, reflecting the gruelling slowdown in manufacturing.
Tesco shares are struggling this morning (down 2.8%) after the latest data from Kantar indicated that its market share has fallen.
Tesco’s market share fell from 27.7% to 27.3% in the 12 weeks to 19 May, while Sainsbury’s and Asda (still stinging from the collapse of their merger) also saw drops in market share to 15.2% each.
Indeed, Sainsbury’s saw sales drop by 1.7% during the period compared to the same time last year.
Here are the full figures – just look at the march of the discounters, Lidl and Aldi:
Some news with something of a read-across to British Steel, one of the big corporate stories of last week: the world’s largest steelmaker has cut production in Europe because of weak demand.
ArcelorMittal cut steel production in its main market, Europe, for the second time this month, blaming weak demand and high imports, Reuters reported. The company said it would reduce primary steel production at its facilities in Dunkirk, France and Eisenhuettenstadt, Germany.
For British Steel this weak demand could make it harder to find a willing buyer, after the exit of private equity investors Greybull Capital.
Government officials working on the liquidation of British Steel have spoken to 80 potential bidders. Yesterday they said “multiple parties” had expressed an interest in taking on all or part of the business.
A British tech float for your delectation this morning: rail tickets website Trainline is planning to list next month.
The company plans to raise £75m in its June initial public offering. Private equity owner KKR is looking for a valuation of as much as £1.5bn, according to Reuters – meaning the company would join the select ranks of Britain’s tech unicorns (with a valuation of more than $1bn/£790m).
Founded more than 20 years ago, Trainline sells tickets from 220 rail and coach carriers across 45 European and Asian countries on its website and mobile app, generating net ticket sales of £3.2bn in the fiscal year 2019.
Confirmation that stocks have fallen across the board in Europe.
France’s Cac 40 is the worst performer, while Spain’s Ibex has also suffered. The FTSE 100 is down by 0.9%.
And meanwhile, the UK has the spectacle of a Conservative leadership election for the next few weeks while a caretaker prime minister prepares for the exit.
Let’s see how long this “clean campaign pledge” lasts. One of the signatories is already making (euphemism alert) four-letter digs at a rival – so that’s going well.
🚨 Tory leadership latest 🚨
— Sebastian Payne (@SebastianEPayne) May 28, 2019
In an interview with the @FinancialTimes, @MattHancock has launched a broadside against Boris Johnson over his (and the Tories) anti-business stance.
“To the people who say ‘fuck business’, I say ‘fuck, fuck business’.”https://t.co/c5W8zb8ome
Overseeing Britain’s political ructions in parliament will be the speaker of the house, John Bercow, who has pledged to stay on in the role – despite previous expectations he was about to leave.
The speaker told the Guardian it was not “sensible to vacate the chair” while there were major issues before parliament, in a move likely to enrage MPs backing a no-deal Brexit.
Rare earths are truly in focus today: shares in Rainbow Rare Earths have jumped by 11% after China’s barely veiled threat to use its hold on the supply of the valuable minerals in the trade dispute with the US.
China is not known as a commodities superpower – it is still notably dependent on imports of oil and gas – but what it does have it appears determined to use as leverage in the battle with Trump’s White House.
The value of rare earth metals comes in advanced electronics particularly for their magnetic properties.
European stock markets have taken a heavy tumble as well at the open.
The FTSE 100 and FTSE 250 are both down by 0.7%.
Germany’s Dax is down by 1%, France’s Cac 40 is down by 1.2%, and the broad Stoxx index has lost 0.85% in early trading.
Introduction: Asian shares stumble as trade dispute sets nervous tone
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
There is not much positive feeling around on markets this morning, with macroeconomic fears and trade tensions in the air. Asian markets have fallen, with Japan’s Topix down by 0.9% and Hong Kong’s Hang Seng index down by 0.35%.
Yields on benchmark government bonds (which move inversely to prices) have fallen as investors have pivoted to safety. The US 10-year Treasury bond fell to as low as 2.226%, its lowest level since September 2017.
It is fairly easy to understand the nervy feel, with the trade dispute between the US and China still very much in focus. Chinese newspapers today signalled that rare earths could be the next front in the trade dispute. Commentaries suggested the country could use its dominant position as a supplier of the valuable minerals to the US in the trade dispute with Donald Trump’s White House.
Here’s the editor of the state-controlled Global Times:
Based on what I know, China is seriously considering restricting rare earth exports to the US. China may also take other countermeasures in the future.
— Hu Xijin 胡锡进 (@HuXijin_GT) May 28, 2019
In the EU, Italy has been adding to nerves, with strong words from far-right deputy prime minister Matteo Salvini suggesting that he may be up for another stand-off over running a budget deficit – a grim prospect for investors.
The arm wrestle over who will take the top jobs began yesterday, with France’s Emmanuel Macron pointedly snubbing Angela Merkel’s preferred (centre-right) candidate for European Commission president, Manfred Weber. The European Central Bank is the other (arguably more) important job that will be up for grabs.
Macron and the centrist ALDE group could be kingmakers in the European parliament, with a decision due at the next leaders’ summit on 20-21 June.
The agenda
- 8am BST: European Central Bank speech by Jens Weidmann
- 8:30am BST: European Central Bank speech by Yves Mersch
- 8:55am BST: Germany unemployment rate (May)
- 9am BST: European Central Bank financial stability review
- 9am BST: Italy consumer confidence (May)
- 3pm BST: Bank of Canada interest rate decision
