Summary: Hammond defends May's Brexit deal, as service sector slows
Time for a recap.
Chancellor Philip Hammond has claimed that the economic cost of ‘betraying’ Leave voters would be worse than actually leaving the European Union.
Testifying to the Treasury committee, Hammond argued that Britain needs to leave the EU, and then rebuild itself.
My own judgement is that we need a way forward that heals our country.
We have a deeply fractured country with opinion deeply polarised and trust in the political system correspondingly damaged.
Divided countries are not successful countries.
Hammond told MPs that the White Paper deal drawn up between Theresa May and the EU would lead to lower growth than staying in the EU, but insisted that people would still be richer than today in 15 years time.
Hammond also warned that it would take many years to adjust to a no-deal Brexit, and build the infrastructure and customs checks that would be needed.
The chancellor cautioned that the Bank of England probably wouldn’t be able to provide much support in a no-deal scenario, so the government would provide fiscal help.
He also predicted that the economic adjustment to no-deal could take many years:
Rather like after 1980, when over a decade our economy made a significant adjustment away from certain patterns of industrial and commercial activities to other patterns of industrial and commercial activities.
Hammond was speaking after new data showed that UK economic growth slowed sharply last month. Data firm Markit reported that the service sector barely expanded, as companies were hit by Brexit fears and the trade dispute between US and China.
Economists warned that the economy seems to be stagnating.
The eurozone also had a bad month, with private sector growth in Germany hitting its lowest level in almost four years.
UK car sales have also fallen, 3% lower than in November 2017, as weak consumer confidence hit the sector.
Updated
Hammond: No-deal Brexit would be like the 1980s
Q: If Theresa May’s deal is rejected next week, will the Treasury plan for a no-deal?
Hammond says yes, the government already has extensive preparations in place.
However, he believes it would be a terrible outcome for the UK economy.
Q: What might the government’s response look like?
Hammond reiterates that the Bank of England may not be able to provide a monetary response, so fiscal policy would need to support the economy.
But Britain’s debt-GDP ratio is already unsatisfactorily high, so the fiscal firepower is limited.
So the economy would have to adjust. And Hammond suggests it would be a bumpy ride.
He says companies which rely on trade with the EU would have to significantly lower their costs, to overcome the frictional costs, or find new markets. Or labour and capital would move.
Hammond harks back to the Thatcherite economic revolution, predicting Britain would experience “a prolonged period of adjustment”
Rather like after 1980, when over a decade our economy made a significant adjustment away from certain patterns of industrial and commercial activities to other patterns of industrial and commercial activities.
That might send a chill through certain parts of the UK, where factories and mines shut and unemployment soared, as the government hiked interest rates and tried to squeeze inflation out of the economy.
The session is now over...
Hammond: No deal would result in a 1980s style shift in economy away from some industries towards others. Also says Treasury would have to do most of the work in mitigation as BoE's hands would be tied by higher inflation - Not sure many believe that.
— Simon Jack (@BBCSimonJack) December 5, 2018
Hammond: Failing to move on from Brexit would be catastrophic
Labour MP Wes Streeting is grilling Hammond about his claim that failing to respect the referendum result would cause more damage than abandoning Brexit.
Streeting says that Leave-voting constituents feel that the government is now ‘mitigating risks’, while Remain supporters are pretty upset by the loss of economic potential. They don’t see a brighter vision for Britain outside Europe.
Q: Hasn’t the last two years been about damage avoidance, rather than moving towards a brighter future?
Hammond reiterates his point that Britain needs to implement Brexit, so it can move onto other issues.
What would be catastrophic would be to fail to move on.
We have to resolve this, so we can go back to rolling out the latest technologies, to supporting our businesses to grow, to focusing on up-skilling.
Hammond: "Once we have left the EU, we will have a very large and very active embassy in Brussels" pic.twitter.com/LL1ML9Szk5
— Adam Parsons (@AdamParsons1) December 5, 2018
Hammond says the government isn’t pursuing ‘passporting rights’ for UK banks after Brexit, as it simply isn’t on the table.
So for services, the government is pushing for a ‘looser’ relationship than for manufactured goods.
That is meant to avoid “getting caught in a rule-taking trap”.
The chancellor says the UK has been very successful in shaping EU rules on finance in recent decades, and will keep contributing after Brexit.
Once we have left the European Union, I imagine we will have a very, very large and very active embassy in Brussels, that will spend a great deal of time and effort seeking to make input to the debates going on within the European Union.
Carney warned food prices cld rise 10% in disorderly Brexit - Hammond claims unilaterally eliminating tariffs wouldn’t prevent as main impact wld be via lower £/ border check costs etc
— Dharshini David (@DharshiniDavid) December 5, 2018
Q: Should the UK just remove all tariffs after Brexit?
Hammond says unilateral cutting of UK tariffs is an option and is something that the government have been looking at.
But there’s a big problem -- you lose leverage when you try to haggle a free trade deal with other countries [Mark Carney made this point yesterday too].
As Hammond puts it:
“We would have nothing to trade”.
And in a no-deal scenario, sterling would depreciate, pushing up the cost of imports such as food.
It might be very hard for the Bank of England to provide new support to the UK economy after a no-deal Brexit, Philip Hammond warns.
That’s because the pound would plunge, sending inflation rocketing, which would typically force the BoE to tighten monetary policy.
The Bank will be looking pretty pretty firmly at the Treasury for a fiscal response, the chancellor adds.
Hammond says that in a no-deal Brexit scenario, the Bank of England would be "looking very firmly at the Treasury to respond through a fiscal response" as the Bank's response would be to tighten monetary policy, so as to combat inflation.
— Richard Partington (@RJPartington) December 5, 2018
-
In other words - expect higher borrowing and lower taxes, but not lower interest rates and more quantitative easing.
Updated
Hammond agrees it is “implausible” that the government wouldn’t take steps to protect and support the economy, if the UK leaves the EU without a deal.
Q: Under each of your scenarios, Britain’s debt/GDP ratio is higher than if we stay in the EU. Doesn’t that mean that the ‘deal dividend’ doesn’t exist?
Hammond denies it. He says the deal dividend does exist, in two parts:
- He has released £15.4bn of extra spending from his fiscal buffers -- effectively extra freedom to borrow once Britain has certainty over its future
- Creating certainty is itself an economic stimulus - and will let the economy recover some of the output lost since the referendum.
Updated
Hammond suggests that if the UK and the EU impose tariffs on each other’s car exports, a UK factory exporting to Europe wouldn’t suddenly close.
Instead, it would probably refocus on the UK market (where European cars would then be more expensive).
But there could be a longer-term hit, once that factory reaches the end of its productive life.
Q: Aren’t you worried that some regions of the UK will suffer badly from Brexit, and won’t be able to recover?
Hammond says his policy will actively minimise the impact of Britain leaving the EU, such as new funding for artificial intelligence.
Q: Why has so little been done to prepare Dover for a no-deal outcome?
Hammond denies that the government has been sitting on its hands. But moving to a WTO-type trading relationship would require major work -- taking years, not months.
He says:
To be very frank with you, the planning system might struggle to approve such significant infrastructure changes in two years, let alone get them build.
On the Northern Ireland backstop, Hammond doesn’t accept that the backstop would endure forever.
The EU is a highly legalistic body, he explains, and doesn’t make promises casually.
Hammond: "I don't think the backstop is something that can endure forever"
— Richard Partington (@RJPartington) December 5, 2018
Worryingly, the chancellor says there has only been ‘patchy’ engagement with other EU countries about how the UK border would be managed after a hard Brexit.
Hammond says that UK-EU and bilateral engagement over no-deal Brexit border management has been "patchy" - some countries are better than others.
— Richard Partington (@RJPartington) December 5, 2018
Q: What happens if MPs reject Theresa May’s Brexit deal next week?
We would be in uncharted territory, Hammond replies. That’s why it’s important that MPs understand the implications of various Brexit scenarios.
If parliament votes down PM’s brexit deal -
— Helia Ebrahimi (@heliaebrahimi) December 5, 2018
“We are in unchartered territory”
Says @PhilipHammondUK warning that MPs need to understand there’ll be consequences
Q: Is it responsible to tell parliament that it’s this deal, or no deal?
I don’t think parliament is in that situation, says Hammond. If it rejects the White Paper, it would have to choose from the various scenarios. His preference is for the PM’s deal.
BREXIT-UK'S HAMMOND SAYS IF PARLIAMENT DOESN'T BACK MAY'S DEAL, IT WILL HAVE TO LOOK AT OTHER SCENARIOS - RTRS
— Martin Baccardax (@mdbaccardax) December 5, 2018
Hammond contradicts PM, who says it's her deal or "no-deal".
Q: How can the nation come together, given some regions will be worse off after Brexit, and people will be poorer?
Philip Hammond says people will be better off in 15 years time than today, under all Brexit scenarios. But the economy will be smaller than it would be if Britain had stayed in the EU.
Philip Hammond: Leaving the EU has an economic cost, but it's worth it
The Treasury committee turn to the economic cost of Brexit.
Q: You have said the UK will be worse off after Brexit, and you’ve also said the people didn’t vote to be poorer. Can you reconcile these two positions?
Chancellor Hammond says he can.
The governments’s analysis clearly shows that leaving the European Union under any scenario we have modelled has an economic cost, he explains.
In the case of the White Paper proposal [Theresa May’s deal], that cost is very small after 15 years, but it is still a cost.
[reminder: the analysis shows the UK economy would be 3.9% smaller after 15 years under Theresa May’s Brexit plan, compared with staying in the EU, while a no-deal Brexit could deliver a 9.3% hit]
Hammond argues that the smaller impact would be worth it.
My own judgement is that we need a way forward that heals our country.
We have a deeply fractured country with opinion deeply polarised and trust in the political system correspondingly damaged.
Divided countries are not successful countries.
The chancellor, who campaigned to stay in the EU in 2016, says he has thought “long and hard” about the issue, and concluded that the referendum result must be carried out.
I have come to the conclusion that the future success of our country depends on us executing the instruction of the British people in the referendum, leaving the European Union, but doing so in a way that minimises the impact on our economy, and maximises the opportunity we have in the future.
This, Hammond argues, will let the UK “come together as a nation” and work together to exploit the opportunities of Brexit.
Any solution that left the country divided, and left a large segment of the population feeling betrayed, would in my view have a negative political and societal impact that would out-weigh the very small impact of the White Paper.
Updated
UK FinMin Hammond: Cabinet Agreed That Gvt Brexit Economic Scenarios Were Appropriate
— LiveSquawk (@LiveSquawk) December 5, 2018
The Treasury committee are challenging Hammond over the government’s economic analysis, released last week.
Q: Why is there no analysis of the Northern Ireland backstop?
The Treasury’s forecasts are a “long-term economic analysis”, Hammond explains - looking at the “steady state” of the economy in 15 years time (once it has adjusted to the shock of Brexit).
The backstop is meant to be temporary, so it doesn’t feature in this long-term work.
Committee chair Nicky Morgan says she also asked for analysis of the short and medium-term impact - where is it??
Hammond replies that the Bank of England is better placed to do that work, and indeed has done it (it was also published last week).
Chancellor Hammond has news -- on the spring statement (updating MPs on the nation’s finances).
It will take place sometime between the end of the recess in February, and the end of March, he says.
By then, we might have much more clarity on Brexit....
Chancellor Philip Hammond is testifying to the Treasury committee now, about the UK’s economic relationship with the European Union.
It’s being streamed here.
After over 2 days of Brexit hearings (& start of debates), Treasury Select Committee might feel a touch jaded. But up next is the Chancellor - and it's not unheard of for him to use the opportunity to let off steam
— Dharshini David (@DharshiniDavid) December 5, 2018
Economist Andrew Sentance, who used to sit on the Bank of England’s interest rate-setting committee, has declared that Britain would be better off staying in the EU.
Quizzed by the Treasury select committee this morning, Sentance said:
I’m not greatly enthusiastic about Brexit. I think we’d be better off if we weren’t Brexiting and I do think a no deal scenario could be quite disruptive.”
“Even if we strike trade agreements with the EU and some other countries, it means that by 2030 the hit to GDP is relatively small about 1% or so, but we didn’t find that things are actually better than they would have been if we were in the EU.
“You do have to recognise that we have a very good degree of access to the European markets as the moment. We have quite good access to a range of other markets, we do quite a lot of trade with the United States and it’s not clear that new trade agreements will boost that to a great degree.”
Sentance told MPs that Britain risked being bit by a new wave of global protectionism, which could exacerbate the negative impact from Brexit.
Sentance also reiterated his criticism of the Bank of England for its warnings last week that Britain would suffer an economic shock if it left the EU without a deal.
“The Bank appeared to be throwing in the kitchen sink to create the most negative possible scenario. In its own terms it looks pretty extreme.
“The Bank has a number of different roles… It wasn’t totally clear that this was a very extreme view even in the Bank’s own terms. The communication of it was less than ideal as well.
The Bank has appeared to get drawn into the political debate in a way that they might have avoided.”
Shares down, but pound up
The shock news that Britain’s service sector companies struggled to grow last month hasn’t brought any festive cheer to the City.
The FTSE 100 index of top blue-chip shares is still deep in the red, down 83 points or 1.2% at 6939.
Investors remain worried about a deepening US-China trade war, following Donald Trump’s ‘Tariff Man’ tweets last night.
The pound, though, has gained half a cent to $1.278, amid chatter that the risk of a no-deal Brexit has fallen after yesterday’s historic drama at Westminster.
Ben Stephens of City firm Daniel Stewart says sterling is trapped in “a morass of political intrigue and speculation!”
The scale of the defeat of the government’s Brexit deal in next week’s Parliamentary vote is likely to be the key driver of Sterling into year-end; a heavy defeat could be negative for the currency as it would draw into question May’s ability to cling to power, a arrow defeat could suggest the deal could slip through on a second or third attempt.
Yesterday narrow but humiliating vote that the Government is in contempt by refusing to release legal advice on Brexit is yet another unhappy incident.
MP: Services slowdown is taste of Brexit Britain
Liberal Democrat MP Tom Brake MP says the economic slowdown should alarm ministers, as they grapple with the Brexit crisis.
Here’s his take on the sharp drop in service sector growth last month.
“News that confidence in the service sector is the lowest since Brexit should ring alarm bells in Government.
“The UK economy depends very heavily on the service sector for jobs, yet the sector has been almost completely neglected by the Prime Minister in her deal. The service sector reeling from Brexit uncertainty now, before we have even left, is just a foretaste of what will happen to the sector if we do leave the EU.”
This chart, from Markit’s PMI report, underlines how growth has weakened in recent months:
Luxury bathroom business Sanctuary Bathrooms has confirmed that Brexit is hurting the economy.
The Leeds-based company is facing price rises and anxious customers, plus it’s getting harder to obtain stock. As such, it’s hard to plan for the future.
James Roberts, Director of Sanctuary Bathrooms, says the uncertainty over Britain’s exit from the EU is the main issue facing the company -- which backs up the message from Markit this morning.
Roberts explains:
“Some suppliers are already increasing their prices in 2019, which mean it’s going to be unavoidable for customers to avoid price increases across a number of different industries. Similarly, we’re finding it difficult to get stock from suppliers, which makes our own trading slightly more challenging. Whether this is precautionary from themselves against the exchange rates and financial market is hard to say.
“We’re also finding that the retail market has changed over the last 12 months. Consumers seem to have changed their own attitudes from buying in bulk to buying more individual items, meaning a lower average spend per customer. This could also be tied to feedback we’ve had that the ability for customers to get qualified tradespeople to do the work is also becoming more difficult with a skills gap.
“In terms of our own ambitions for the New Year, we’re still looking for a positive and modest growth and we’re optimistic that despite Brexit, we’ll still see footfall and trading at similar levels but I think everyone is wary about what the next 3 months may bring – you can’t prepare long-term at this moment in time.”
David Smith, economist at Dutch bank ING, believes the fear of a no-deal Brexit is hurting the UK economy....and the damage could get a lot worse.
Here’s his take on the service sector slowdown:
According to Markit/CIPS, “delays with clients’ business investment decisions” was a key reason for the decline, and we expect this trend to persist over the winter. If the government’s Brexit deal is rejected by Parliament, then we’re unlikely to know for sure whether ‘no deal’ has been averted until much closer to the UK’s scheduled leave date in March (or later if article 50 has to be extended). This is likely to see an increasing number of firms implement contingency plans – various surveys point to the fact that a reasonably high proportion of firms are yet to do so. At the very least, investment and hiring plans are likely to be put on hold until there is greater clarity.
As we move into the critical Christmas trading period, there’s also a risk that this sentiment begins to spill over into the consumer sector. There’s already some evidence in the most recent confidence numbers that households are growing more cautious about the general economic situation, which makes for a tough few weeks for retailers and will act as a further drag on overall economic momentum.
The UK services PMI now sits at the lowest level since the immediate aftermath of the 2016 referendum. This clearly demonstrates that the elevated risk of a ‘no deal’ Brexit is beginning to have a tangible impact on growth, says @SmithEconomicshttps://t.co/IyG6IWMn4X
— ING Economics (@ING_Economics) December 5, 2018
Updated
In another blow, UK service sector companies are struggling to find workers.
Several firms interviewed by data firm Markit reported difficulties recruiting suitably skilled staff.
UK service sector slowdown: snap reaction
The weakening of Britain’s service sector last month is a ‘nasty surprise’, says Howard Archer of EY Item Club.
He adds:
Brexit uncertainties and concerns over global growth weighed on demand for business services...
We have been expecting UK GDP growth to halve to 0.3% quarter-on-quarter in the fourth quarter from 0.6% in the third, but the November PMI’s suggest the slowdown could be even more pronounced. This would result in overall GDP growth of 1.3% in 2018, which would be the weakest performance since 2009
Economist Simon French of City firm Panmure Gordon believes the slowdown may force MPs to reach a Brexit deal quickly:
UK Services PMI at 50.4 (52.2 prev.) - the lowest since July 2016. Growth is stalling in Q4. There have been false signals before most notably that mid-2016 print, but if poor macro is persistant (& broaden to jobs market) it'll pressure MPs to conclude a #Brexit deal. pic.twitter.com/MJ2SenyaD3
— Simon French (@shjfrench) December 5, 2018
Economics journalist Ulrik Harald Bie points out that manufacturers had a better month (as did construction firms), but fears that the wider trend is still down:
Global slowdown and Brexit uncertainty have impacted business confidence in the UK. Markit PMI is down sharply for the service sector in November, while manufacturing increased m/m, but still with a downward trend. Weakest reading since the Brexit referendum #UK #macrobond pic.twitter.com/RN3aIRLMK0
— Ulrik Harald Bie (@UlrikBie) December 5, 2018
Chris Sood-Nicholls of Lloyds Bank Commercial Banking, blames a number of headwinds:
“Firms are reluctant to commit amid such prolonged uncertainty, global demand is falling, trade tariffs are continuing to bite, and consumer-facing sectors are also seeing a slowdown since the more free-spending summer months.
Duncan Brock, group director at the Chartered Institute of Procurement & Supply, is also alarmed by the slump in UK service sector growth.
He blames Brexit uncertainty, plus the persistent threat of a full-blown US-China trade war.
“Disregarding the month immediately after the UK’s vote to leave the EU in 2016, the services sector put in its worst performance for almost six years as confidence, a lack of strength in the global economy and Brexit uncertainty took its toll.
“Service providers grappled with the lowest growth of new work from domestic and export markets for nearly two- and-a-half years as paused business contracts remained stuck and not even the temptation of discounted prices encouraged consumers to spend.
UK services sector PMI slumps towards stagnation as Brexit bites
NEWSFLASH: UK service sector growth has fallen to near-stagnation, with business confidence weakest since Brexit vote.
Data firm Markit’s monthly UK services PMI has dropped to just 50.4 in November/ That’s the weakest reading since just after the 2016 EU referendum.
Service sector companies have reported that business activity and incoming new work both expanded at the weakest rates for almost two-and-a-half years.
Several firms told Markit that heightened Brexit uncertainty had led to delays with clients’ business investment decisions.
That’s a major blow to the economy, as services makes up roughly 80% of economic output
Chris Williamson, Chief Business Economist at IHS Markit, is very concerned. He believes overall UK growth may have slowed to just 0.1% this quarter.
“A sharp deterioration in service sector growth leaves the economy flatlining in November as Brexit concerns intensified. Measured across services, manufacturing and construction, the survey results suggest that the pace of economic growth has stalled.
With the exception of July 2016, when business slumped in the immediate aftermath of the EU referendum, November saw the worst performance since February 2013.
“The surveys are so far consistent with 0.1% GDP growth in the fourth quarter, thanks to the expansion seen back in October, but growth momentum has since been lost and risks are clearly tilted to the downside.
More to follow!
Updated
Eurozone company growth hits 27-month low
Ouch! Growth across the eurozone’s private sector companies has hit its weakest level in over two years.
Trade war fears and Brexit seem to be biting.
Data firm Markit has reported that its ‘eurozone PMI composite output index’ fell to 52.7 last month, down from 53.1 in October.
That’s the weakest growth since September 2016, and close to the 50-point mark showing stagnation.
Markit blames political and economic uncertainties, especially around trade, which has hurt Europe’s largest economy.
It was in Germany where the euro area’s growth slowdown was centred, with latest data showing the weakest expansion here in nearly four years.
However, Italy remained the weakest-performing country, with activity slightly down for a second successive month. In contrast, firmer growth was seen in Ireland, France and Spain, although rates of expansion remained down on those seen earlier in the year.
UK car sales fell in November
Newsflash: UK car sales fell by 3% last month, as Brexit angst weighed on the market.
The Society for Motor Manufacturers and Traders reports that 158,639 new vehicles were registered last month, nearly 5,000 fewer than a year ago.
The SMMT blamed uncertainty, falling consumer confidence and supply constraints -- as car manufacturers struggle to implement new tougher emission tests.
Electric car sales have jumped by 25% year-on-year, but at 10,769 they only make up a small (but growing) section of the market.
Petrol car sales rose by 3.5%, while diesel shrunk by 16.7%.
Mike Hawes, chief executive of the SMMT, says:
“Model and regulatory changes combined with falling consumer confidence conspired to affect supply and demand in November.
The good news is that, as supply constraints ease, and new exciting models come on sale in the months ahead, buyers can look forward to a wide choice of cutting-edge petrol, diesel and electrified cars. It’s now critical that a Brexit deal is secured to boost consumer confidence and provide a stimulus to the new car market as we enter the New Year.”
European stock markets have fallen to a two-week low.
The Stoxx 600 index has shed 1.2%, as traders in Frankfurt, Paris, Madrid and Milan join the selloff.
Just 48 hours ago, the markets were rallying after Trump claimed trade war success at his dinner date with Xi Jinping.
That optimism has swiftly fizzled out, partly because Beijing still hasn’t confirmed what Xi has actually conceded.
Connor Campbell of SpreadEx says investors have come to their senses.
Though it seemed naïve at the time, Monday’s rally now looks positively deluded, investors gullibly swallowing news of a truce between the US and China, only to be bitten for the umpteenth time by Trump’s trade boasts.
Tweeting that he is a ‘Tariff Man’, the President said that ‘when people or countries come in to raid the great wealth of our Nation’ he wants ‘them to pay for the privilege of doing so’, claiming America is ‘taking in $billions in Tariffs’. Nonsense, perhaps, but harmful nonsense nevertheless, with the Dow Jones losing its goddamn mind in the meme-able aftermath, the index plunging 800 points to sink back to a one week low of 25000.
The FTSE 100 is now at its lowest level in almost two weeks, undermining hopes that a ‘Santa Rally’ might drive stocks up this month.
A flurry of sell orders is driving share down in London, as trading gets underway.
The FTSE 100 has shed more than 80 points, or 1.2%, to 6938 points, following the heavy losses in the US last night.
Virtually every company on the index is down -- led by financial stocks, energy companies, tech firms, industrial stocks and miners.
The only riser - pharmaceuticals firm Shire, whose takeover by Japan’s Takeda has just been agreed.
China is attempting to calm the jitters, by declaring that last weekend’s meeting between president Xi and president Trump was “very successful”.
The commerce ministry added that officials will start implementing the agreed measures immediately.
However, the brief statement doesn’t confirm exactly what those plans are.
Trump: REAL DEAL or no deal
After Wall Street closed, president Trump fired a warning shot at Beijing -- tweeting that he will impose higher tariffs on China soon unless they make concessions.
We are either going to have a REAL DEAL with China, or no deal at all - at which point we will be charging major Tariffs against Chinese product being shipped into the United States. Ultimately, I believe, we will be making a deal - either now or into the future....
— Donald J. Trump (@realDonaldTrump) December 5, 2018
.....China does not want Tariffs!
— Donald J. Trump (@realDonaldTrump) December 5, 2018
Updated
The agenda: Markets wobble after 'Tariff Man' tweet
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
Global stock markets are edgy today after Wall Street suffered a whopping selloff, as fears of a US-China trade war resurfaced.
The Dow Jones industrial average slumped by nearly 800 points, or 3%, after president Trump tweeted that he was a ‘Tariff Man’, determined to make America rich again by charging other countries for the privilege of trading with it.
....I am a Tariff Man. When people or countries come in to raid the great wealth of our Nation, I want them to pay for the privilege of doing so. It will always be the best way to max out our economic power. We are right now taking in $billions in Tariffs. MAKE AMERICA RICH AGAIN
— Donald J. Trump (@realDonaldTrump) December 4, 2018
That’s not how tariffs really work, of course (they’re either passed onto consumers, or swallowed by importers).
But Trump’s tweets have spooked investors, denting confidence that the US and China will strike a proper peace deal in 2019.
Fiona Cincotta of City Index says:
It was good while it lasted. The rally Monday on the back of the respite in the China-US trade war came to a crashing halt today after President Trump raised doubts that the two countries will be able to find middle ground by the 90-day deadline they have put in place this weekend.
Trump called himself the Tariff Man in a series of ambiguous tweets where he repeated the threat of raising the tariffs on China from 10% to 25% if the two countries don’t end up agreeing on trade issues within the next three months.
Asian stock markets have shifted lower today, with China’s main indices down 0.5% and the Hong Kong Hang Seng losing 1.5%.
European stock markets are heading for losses too, with the FTSE 100 expected to drop around 1%.
Wall Street will be closed today, though, as part of a national day of mourning for President George Herbert Walker Bush.
Hopes of a festive ‘Santa Rally’ are fading fast, replaced by worries over trade wars and a global economic slowdown.
As Tai Hui of J.P. Morgan Asset Management puts it:
Economic growth momentum is taking over as the primary concern for investors, even as the latest ISM manufacturing data is holding up well.
This is consistent with our view that the market volatility is likely to rise as we get deeper into the late cycle, with investors questioning growth dynamics and increasing their sensitivity towards downside risks to growth.
S&P 500 falls as much as 3%; Dow is down more than 700 points https://t.co/YHvfhR6RRk pic.twitter.com/3etrkjSO53
— Bloomberg Markets (@markets) December 4, 2018
Also coming up today
We find out how service sector companies in the UK, the eurozone and the US fared last month. A weak performance might give investors fresh reasons to fret.
New UK car registration figure are also out, and may show that consumers have been reluctant to buy a new vehicle in the current uncertain climate
The agenda
- 9am GMT: UK car sales figures for November
- 9am GMT: Eurozone service sector PMI for November
- 9.30am GMT: UK service sector PMI for November
- 3pm GMT: UK service sector PMI for November
Updated
