US services better than expected
The US service sector grew by more than forecast in March, according to Markit, but not enough to mask concerns about the overall state of the world’s largest economy
The services final PMI came in at 51.3 compared to an initial estimate of 51 and the 49.7 figure for February.
The composite PMI - services and manufacturing - rose from 50 in February to 51.3 in March, up from the first reading of 51.1.
But the new business index hit its lowest level since the survey began in October 2009.
Chris Williamson, chief economist at Markit said:
The welcome news of sustained robust hiring in March, as indicated by both the PMI surveys and non-farm payroll numbers, masks a more worrying picture of a further slowing in economic growth so far this year.
The survey data, which have historically provided a reliable guide to official GDP numbers, suggest the annualized pace of economic growth weakened to 0.7% in the first quarter.
Demand is growing at the slowest rate since late- 2009 and, with business optimism also sliding to its weakest since the recession, firms clearly expect worse to come. Firms are worried about a potential weakening of demand both at home and abroad in the face of various headwinds. As such, the data support the cautious approach to policy tightening currently advocated by Fed Chair Janet Yellen.
On that note, it’s time to close for the day. Thanks for all your comments, and we’ll back tomorrow.
Wall Street opens lower
The combination of volatile oil prices, the IMF warning of risks to the global economy, and a spate of uninspiring economic data has seen Wall Street follow other markets into the red.
Morgan Stanley cuts US Q1 GDP forecast from 0.8% to 0.5% after worse than expected trade report.
— Morris Cabrioli (@insidegame) April 5, 2016
On top of all that, there is the added wrinkle of uncertainty over the path of US interest rates, ahead of Wednesday’s release of the minutes from the March Federal Reserve meeting.
So the Dow Jones Industrial Average is down 105 points or 0.5%, while the S&P 500 is down 0.4% and Nasdaq 0.7% at the open.
In Europe, Germany’s Dax is down 2.5% and France’s Cac has fallen 2.3%. Meanwhile the FTSE 100 is currently down 1.1%.
Updated
America’s trade deficit widened by more than expected in February, up 2.6% to $47.1bn rather than the $46.2bn forecast by analysts.
An revival in exports was offset by an increase in imports, making the deficit the highest since August.
With the yen at a 17 month high against the dollar despite Japan’s negative interest rates, it is no surprise there have been suggestions the country’s central bank could be prepared to act again. Now Reuters is reporting that it will consider further measures at its meeting this month:
Bank of Japan policymakers will likely debate the possibility of easing monetary policy further at a rate review this month, as a raft of gloomy data threatens their scenario that a moderate economic recovery will accelerate inflation towards a 2 percent target, sources familiar with their thinking said.
If the central bank were to act, it would more likely increase asset purchases than cut interest rates, the sources said, as financial institutions are still scrambling to adjust to a negative rate policy deployed in January.
But a decision on whether to ease at the April 27-28 review will be a close call as many BOJ officials are wary of using their limited policy tools again so soon, especially as the negative rate move has proved unpopular among the public.
“It will be a question of whether the BOJ feels it has forestalled risks in January or whether they feel that January’s action wasn’t enough,” said one of the people familiar with the BOJ’s thinking.
The BOJ stunned markets in January by adding negative interest rates to its massive asset-buying programme, dubbed “quantitative and qualitative easing,” to forestall the risk of external headwinds derailing a fragile economic recovery.
But the move failed to boost stock prices or arrest an unwelcome yen rise, drawing criticism from lawmakers and investors as confusing rather than calming markets.
The latest warning from the IMF follows a familiar pattern, but the fund has to do more than just talk, says Larry Elliott. It needs to act as well.
His full analysis is here:
Britain could enter a recession at the end of 2016 if it votes to leave the European Union, according to strategists at Aviva Investors. They said:
Aviva Investors believes that if the UK were to vote to leave the EU, there would be a significant and negative knock-on effect on business sentiment, which would likely push the UK economy into recession towards the end of this year. The consequences of a vote to leave wouldn’t just be felt temporarily. There would likely be a permanent reduction in exports to the EU, while foreign-direct investment into the UK would also suffer, leading to higher unemployment and a decline in the country’s long-term growth potential. Furthermore, negotiations to leave would be complex and difficult. EU leaders would not be expected to give the UK an easy ride for fear of encouraging others to follow.
Looking further ahead, the likely reduction in exports to the EU could reduce national income by three per cent, rising to as much as ten per cent in a worst-case scenario. Finally, the long-term growth potential of the UK could also be negatively impacted by, amongst other things, lower foreign direct investment. While any estimate of that effect is highly speculative, it could potentially shave 0.2-0.4 percentage points off growth.
Financial markets would undoubtedly react badly to a vote in favour of ‘Brexit’ too. Aviva Investors would expect an immediate and sharp fall in the pound. The UK runs comparatively large fiscal and current account deficits, and as such relies on foreign capital to finance the deficiency in domestic saving. If, as anticipated, the uncertainty created by a vote to leave causes international investors to re-appraise their appetite for sterling assets, the decline in the pound could become more severe over time.
While the Bank of England would no doubt ease policy in response to any economic downturn, it seems unlikely this would prevent UK share prices from falling sharply. In particular, shares in smaller companies, which tend to rely more on the domestic economy, would probably underperform. The impact on gilts is less clear. They may benefit from some domestic safe-haven flows, but at the same time, many international investors will be looking to sell.
The continuing slide in crude prices follows the growing belief that a meeting in Doha this month to discuss production freezes to deal with the supply glut may not come up with anything concrete.
So oil could see further volatility ahead, according to Bjarne Schieldrop, chief commodities analyst Nordic bank SEB:
The latest price moves to the downside was an accident waiting to happen as far as we can see. We never could believe why much hope at all was placed on the production freeze discussion and the connected Doha meeting on 17 April. Nonetheless it probably helped to hold Brent in a sideways trading range during most of March as well as helping to build up a record net long speculative position in Brent crude. Then with Saudi Arabia’s straight talk on production freeze placing the whole issue in the Iranian camp, the continuous building in Brent speculation halted and is now instead in reverse.
Crude is also being hit by an unexpected fall in gasoline demand in the US, as revealed by the Energy Information Administration on Monday.
Updated
In the wake of the IMF worrying about emerging markets, ratings agency Standard & Poor’s reckons the Asia-Pacific region will still lead global growth this year despite its tumultuous start to the year. In a new report, it said:
“We believe the market’s concerns leading up to the sell-off in global markets, while having some validity, were overdone--and even a bit misguided,” said Paul Gruenwald, Standard & Poor’s chief economist for Asia-Pacific.
“We think that the real challenge is picking up the pace of structural reforms China needs to implement as it moves toward a more consumption- and services-based model with a greater role for the marketplace.”
Standard & Poor’s GDP forecast for the region is little changed from November 2015 at 5.3% for 2016 and 5.2% for 2017. “India leads the pack with GDP growth projection of 7.9% for the fiscal year ending March 2017. But this is one-cylinder growth led by urban private consumption, and we believe it is not sustainable,” Mr. Gruenwald said.
We are maintaining our China GDP growth forecasts of 6.3% for 2016 and 6.1% for 2017. China continues to dominate discussions of the Asia-Pacific (and, at times, global) economic and financial landscape. But gone are the days when forceful, effective, and timely macroeconomic stimulus by Chinese authorities supported domestic (and global) growth and calmed global markets.
“Markets have now shifted their focus to the Chinese currency markets, with the macroeconomic story relegated to a secondary plot,” Mr. Gruenwald said.
We have lowered our Japan 2016 GDP growth forecast to 0.8% (from 1.1%) due to a weak finish in 2015 and have kept our 2017 forecast of 0.4% unchanged. This will be a tough year for the Bank of Japan’s reflation program. Monetary conditions are tighter than desired, mainly because of Japan’s safe-haven status in the markets, which leads to a strong yen.
The task for other Asia-Pacific economies will be to ensure that flexible markets and sound policies will help them to adjust successfully to China’s new growth drivers.
One of the countries to watch for a successful response to China’s rebalancing is Australia. We think that all of the pieces to make this happen are in place--including exchange rate and factor market flexibility, strong government, and nimble financing--but it may take time. We see growth of 2.5%-3% over the next few years, but will be monitoring the composition of investment and exports away from the mining sector. Finally, it is unlikely that the rest of the world will come to the rescue. Reform looks like the only path to higher growth for Asia-Pacific.
Falling consumer confidence does not seem to have had much impact on eurozone retail sales, said Bert Colijn of ING Bank, thanks to low inflation and higher disposable income:
The worthless start of the year for financial markets still has not impacted consumption in the Eurozone much, as retail trade increased with 0.2% month-on-month and 2.4% year-on-year. This surprised analysts as they had expected retail sales to have remained stable in February. This is the highest reading of retail sales since February 2008, which was the pre-crisis peak.
Even though Eurozone consumers are wary of the global economic and political situation, the sharp downturn in consumer confidence over the past months is not yet having much of an impact on retail trade. Negative inflation has been enticing to consumers and stores are profiting. Besides that, the unemployment rate continued to decline in February, which is helping disposable income grow.
The months ahead could still be bleaker though as the labour market has lost a bit of its momentum in the first months of the year and today’s Eurozone service sector PMI indicated a slowdown of growth in March. This means that some weakness could still be ahead of us, but the current pace of sales growth is a good sign for the overall performance of the Eurozone economy in the first quarter.
Eurozone retail sales stronger than expected
Retail sales in the eurozone rose by 0.2% month on month in February and 2.4% year on year, better than analysts had been forecasting.
According to a Reuters poll, the month on month figure was expected to be flat and the annual rise 1.9%.
Growing demand in France and Spain helped offset a fall in Germany, according to the EU statistics office Eurostat. Sales in Germany fell 0.4% month on month after a 0.1% dip in January. But sales in France rose 0.6% and 0.2% in Spain.
Back with the day’s eurozone data, and RBC Capital Markets says it was a mixed picture, particularly for Spain and Italy:
An improvement in the headline composite PMI reading for both Spain and Italy disguises a more mixed picture from the details.
For Spain, an improvement in the services sector suggests that domestic activity remains relatively resilient in the face of its political paralysis but the Italian services reading points to a worrying slowing in the rate of domestic expansion even if a stronger manufacturing reading compensated this month.
Overall, the euro area reading was revised down to 53.1 from the flash of 53.7 leaving it broadly unchanged since February.
Taken together, the PMIs are still pointing to growth of 0.4% in the first quarter although we would note that they did somewhat overstate the pace of the recovery the previous quarter. Of equal concern will be the continuing weakness of both input and output prices which remain in negative territory.
Updated
The uncertainty over the EU referendum is a major reason for the UK economy losing momentum, says James Knightley at ING Bank:
The UK’s service sector purchasing managers’ index has risen a fraction more than expected to stand at 53.7 in March versus 52.7 in February (consensus was 53.5). With the manufacturing and construction PMIs remaining little changed (but at least staying in growth territory) the overall composite index has risen to 53.6 from 52.7. This is still well down on the average level of 2015 and suggests that the UK economy has lost momentum at the start of the year.
An obvious factor behind this is the upcoming referendum on the UK’s ongoing membership of the European Union. With opinion polls suggesting that the vote will be incredibly close, businesses are likely to act cautiously and not embark on any significant expansion plans until the economic outlook is clearer. This means that investment and labour hiring plans will be more limited, which is something that was also highlighted in the recent Deloitte CFO survey. As such, the economy looks set to post slower growth in the second quarter of 2016 than in first quarter.
Should the UK vote to remain within the EU then we suggest that the slowdown will be temporary and the delayed hiring and investment plans will be re—instated, leading to a decent bounce in activity in the second half of 2016.
However, should the UK vote to leave then expansion plans are likely to be cancelled, business and consumer sentiment will take a hit and the Bank of England would likely have to step in with policy stimulus to try and shore-up confidence.
Still, it was at least growth:
Weakest UK service sector growth since Q1 2013, but growth none the less and March's number was a slight improvement pic.twitter.com/TS6rM42Xi3
— RBS Economics (@RBS_Economics) April 5, 2016
The PMI figures seem to suggest a UK interest rate rise is indeed some way off. Chris Williamson, chief economist at Markit, said:
An upturn in the pace of service sector growth in March was insufficient to prevent the PMI surveys from collectively indicating a slowdown in economic growth in the first quarter. The surveys point to a 0.4% increase in GDP, down from 0.6% in the closing quarter of last year.
Across the three main sectors of the economy, firms reported the smallest increase in demand for just over three years, which in turn fed through to a reluctance to take on new staff. March saw the weakest rate of job creation for over two-and-a-half years.
Business confidence remains in the doldrums as concerns about the global economy continue to be exacerbated by uncertainty at home, with nerves unsettled by issues such as Brexit and the prospect of further government spending cuts announced in the Budget.
It therefore seems unlikely that March’s upturn in the pace of growth represents the start of a longer term upswing. In contrast, the survey data suggest growth is more likely to weaken further in the second quarter. With the PMI already in territory traditionally associated with the Bank of England choosing to loosen policy, interest rate hikes seem a long way off.
Commenting on the PMIs, Markit said:
UK service sector growth remained sluggish in March, according to the latest PMI survey data from Markit and CIPS. Total activity increased at a slightly faster rate than in February, but on a quarterly basis growth over the first three months of 2016 was the weakest since the first quarter of 2013. Moreover, incoming new business increased at the slowest rate since January 2013.
Global economic uncertainty and the upcoming EU membership referendum were commonly reported to be factors undermining service sector business expectations during the month. Employment in the sector continued to rise, but at a rate little-changed from February’s recent low. The latest survey data did signal a rise in inflationary pressures, particularly for charges which increased at the fastest rate in over two years.
Markit says the UK has seen the weakest quarter of output growth for three years:
March Markit/CIPS #UK Services #PMI completes weakest quarter of output growth since Q1 2013 https://t.co/CFpLytU5QY pic.twitter.com/DRhVzyRrhe
— Markit Economics (@MarkitEconomics) April 5, 2016
UK service sector sees only slow recovery
Worries about the global economy, as well as the prospect of leaving the European Union, have helped to hold back the UK service sector.
The Markit survey for March shows only a slight recovery after the index reached its lowest level in three years in February.
UK Services PMI (Mar) 53.7 versus 53.5 expected, previous 52.7 | Composite PMI (Mar) 53.6 versus 53.4 expected, previous 52.8 revised 52.7
— Sigma Squawk (@SigmaSquawk) April 5, 2016
The March eurozone PMIs could knock back forecasts for the region’s growth this year, said Howard Archer of IHS Global Insight:
A setback to hopes that the Eurozone economy may just be starting to improve after a dreary start to 2016 as the March services purchasing managers index was revised down markedly to be at a 14-month low
This meant that overall Eurozone services and manufacturing activity could only edge up in March from the 13-month low suffered in February.
The downward revision to the March services PMI fuels concern that Eurozone GDP growth in the first quarter of 2016 was no better than the 0.3% quarter-on-quarter rate seen in both the fourth and third quarters of 2015. Indeed, the composite PMI manufacturing and services output index for the Eurozone dipped to 53.2 in the first quarter of 2016 from 54.1 in the fourth quarter of 2015; this was the lowest quarterly average since the fourth quarter of 2014.
However, it should be borne in mind that January hard data for industrial production and retail sales were healthy. Specifically, industrial production jumped 2.1% month on month and 2.8% year on year in January while there was also relatively solid retail sales volume growth of 0.4% month on month and 2.0% year on year in January
On balance, we still believe that the Eurozone can achieve GDP growth of 1.6% in 2016, which would match the 2015 outturn. However, the risks to this forecast are clearly slanted to the downside.
The market slide is accelerating, with the oil price falling further and the Dax hit particularly hard by the poor factory orders data from Germany. The disappointing service sector data is also hitting sentiment, as well as the downbeat comments from the IMF, with Christine Lagarde warning of risks to the global economy.
The FTSE 100 is now down 1.2% while the Dax has dropped just over 2%. France’s Cac is 1.7% lower.
Meanwhile Brent crude is 0.7% lower at $37.43 a barrel.
Updated
Eurozone service sector sees slowdown in growth
The final reading for the eurozone services PMI has shown a dip from the previous month, and is lower than the initial readings suggested.
The Markit index came in a 53.1 for March, down from 53.3 in February and lower than the first estimate of 54.
The composite index for the eurozone - manufacturing and services - came in at 53.1, up from 53 in February but lower than the initial reading of 53.7. Markit said:
March saw the rate of economic expansion in the euro area improve for the first time in three months. The extent of the acceleration was negligible, however, and less marked than that indicated by earlier flash data. Manufacturing saw faster growth of production, but this was mostly offset by a slower rate of output expansion at service providers.
Markit said the downward revision to the initial composite reading was mainly driven by France and Italy, which between them accounted for 0.5 points of the 0.6 fall.
#Eurozone growth remains subdued during opening quarter of 2016. #PMI at 53.1 (Feb: 53.0) https://t.co/BbzR9ttx3E pic.twitter.com/Vup963JooR
— Markit Economics (@MarkitEconomics) April 5, 2016
Updated
Germany’s services PMI has also come in below expectations.
The index came in at 55.1 in March, down from 55.3 in the previous month and below expectations of a rise to 55.5.
German Services PMI (Mar F) 55.1 versus 55.5 expected, previous 55.3 | Composite PMI (Mar F) 54.0 versus 54.1 expected, previous 54.1
— Sigma Squawk (@SigmaSquawk) April 5, 2016
The composite index is at an eight month low. Markit economist Oliver Kolodseike said:
The German service sector continued to expand at a solid pace at the end of the first quarter, although activity and new order inflows both increased at weaker rates. Moreover, a closer look at the sub- indices highlights some concerns that growth may slow further in coming months. In detail, the amount of work in the pipeline rose only marginally and companies took a more cautious approach with regards to hiring policies, with the rate of job creation the weakest since last July.
Meanwhile, input costs faced by service providers rose at the slowest pace for more than six years, as the low interest rate environment continued to exert downward pressure on inflation.
Elsewhere Italy also saw a slowdown in service sector growth:
Business activity in #Italy service sector rises at slowest rate for over a year as #PMI posts 51.2 in March https://t.co/wraz9hhHcI
— Markit Economics (@MarkitEconomics) April 5, 2016
And also in the composite PMI:
#Italy’s March #PMI down to lowest level in 12m, dealing another blow to hopes that recovery was gaining pace. pic.twitter.com/G9C5exNJXv
— Capital Economics (@CapEconEurope) April 5, 2016
Updated
The French service sector has failed to improve as much as expected in March.
The Markit survey shows the services PMI still below 50, a sign of contraction, against expectations of a figure of 51.2:
French Services PMI (Mar F) 49.9 versus 51.2 expected, previous 49.2 | Composite PMI (Mar F) 50.0 versus 51.1 expected, previous 49.3
— Sigma Squawk (@SigmaSquawk) April 5, 2016
The composite index - manufacturing and services - did hit 50, however, up from 49.3 in February and reaching a two month high.
Jack Kennedy, senior economist at Markit, said:
March PMI data round off a broadly flat performance of the French service sector on average over the first quarter. There remains little sign of the stagnancy lifting – although business expectations rose to the highest since last August they remain subdued in historical terms. Competitive pressures saw another round of output price cutting as firms competed for new business, underlining the challenging environment.
There are also positive service sector figures from Spain, according to Markit. It said:
Growth in the Spanish service sector quickened at the end of the first quarter of the year, with both activity and new orders rising at the fastest rates in four months. An increase in outstanding business was also recorded, and higher workloads encouraged further job creation. The rate of input cost inflation remained relatively weak, but companies raised their output prices for the first time since last October.
#Spain Services #PMI rises to 4-month high of 55.3 in March, up from 54.1 in
— Markit Economics (@MarkitEconomics) April 5, 2016
Feb. https://t.co/rekWmsbfwt pic.twitter.com/bLk68AIQpj
Andrew Harker, senior economist at Markit and author of the report said:
The pick-up in service sector growth in March is something of a relief following a slowdown in previous months, and suggests that the Spanish economy was able to maintain forward momentum during the first quarter of the year. Elsewhere, while output prices were raised for the first time in five months, there is still little evidence of any meaningful inflationary pressure returning to the sector.
The yen has hit a 17 month high against the dollar, prompting talk of possible intervention:
Many rumours of the Bank of Japan intervening to weaken the Yen this morning #Abenomics https://t.co/21IrIyPJFV
— Shaun Richards (@notayesmansecon) April 5, 2016
The yen has been boosted by its status as a haven for investors as equities fall back and commodity prices slide. Yujiro Goto, currency strategist at Nomura, told Reuters:
Clearly risk sentiment is not good and oil prices are declining this week and all these feeding and driving the dollar lower against the yen. The yen is also higher against other currencies.
Of course, the Bank of Japan will be concerned not just about the rise in the yen, but also a drop in stock prices. So we may see some comments from the authorities there, but actual intervention is unlikely until dollar drops below 110 yen.
Updated
The Irish service sector expanded more quickly in March, according to Markit.
Faster expansion in activity in #Ireland service sector as #Investec #PMI rises to 62.8 in March from 62.1 in Feb https://t.co/6lKBajhXyN
— Markit Economics (@MarkitEconomics) April 5, 2016
Philip O’Sullivan, chief economist at Investec Ireland said:
The latest Investec Services PMI Ireland report shows a slight quickening in the rate of growth of business activity, with the headline PMI improving to 62.8 in March from the previous month’s 62.1 reading. This improvement was in spite of a softening in New Orders (to a five month low, albeit it is still in growth territory), while New Export Orders eased to their slowest pace of growth since May 2012. On the latter, while panellists indicated that the UK remained a source of new business, there were suggestions that the recent strengthening of the euro against sterling had weighed on growth of new business.
Another warning from the IMF on the global economy, from managing director Christine Lagarde. Katie Allen writes:
Governments must urgently pursue more growth-friendly policies to shore up a weakening global economy beset with risks, the head of the International Monetary Fund has said.
Christine Lagarde also put governments on alert that they should prepare contingency plans in case threats to the fragile global economy materialise.
“The good news is that the recovery continues. We have growth. We are not in a crisis. The not-so-good news is that the recovery remains too slow, too fragile, and risks to its durability are increasing,” Lagarde said in a lecture at Goethe University in Frankfurt, Germany.
“We are on alert, not alarm. There has been a loss of growth momentum. However, if policymakers can confront the challenges and act together, the positive effects on global confidence, and the global economy, will be substantial,” she said, according to text of her speech.
The full story is here:
With metal prices and oil falling back, it’s no surprise that commodity companies are among the biggest losers so far. The top fallers in the FTSE 100 are:
Tony Cross at Trustnet Direct said:
London’s FTSE-100 has started the session with some notable losses as tumbling commodity prices find themselves back at the top of the agenda. Hopes may have been building that we would see another leg higher emerge for the asset class, but yesterday saw the Dow Jones Non Ferrous Metals Index slump almost 5% and WTI crude is eyeing a move back below $35/barrel, too. As a result it’s the natural resources stocks that are scattered across the foot of the index in early trade, with Royal Dutch Shell and BP also being dragged very much into the fray.
Updated
Interest rate watch: the Reserve Bank of Australia left rates unchanged at 2% as expected, while the Reserve Bank of India cut its main interest rate by 0.25% to 6.5%.
European markets open lower
As forecast, stock markets in Europe have followed their Asian counterparts with sharp falls in early trading.
The FTSE 100 is down 61 points or 1%, while Germany’s Dax has dropped 1.8% after the poor factory order figures and France’s Cac has fallen 1.4%, while Spain’s Ibex is 1.3% lower.
Updated
The IMF is also concerned about the insurance sector:
Across advanced economies the contribution of life insurers to systemic risk has increased in recent years, although it clearly remains below that of banks. This increase is largely due to growing common exposures to aggregate risk, caused partly by a rise in insurers’ interest rate sensitivity. Thus, in the event of an adverse shock, insurers are unlikely to fulfill their role as financial intermediaries precisely when other parts of the financial system are failing to do so as well. The higher common exposures do not seem to be driven by marked changes in insurers’ investment portfolios, although smaller and weaker insurers in some countries have taken on more risk.
The findings suggest that supervisors and regulators should take a more macroprudential approach to the sector. Doing so is necessary if supervision is to go beyond guarding against the solvency and contagion risks of individ- ual firms and take on the systemic risk arising from common exposures. Steps that would complement a push for stronger macroprudential policies include the international adoption of capital and transparency standards for the sector. In addition, the different behavior of smaller and weaker insurers warrants attention by supervisors.
Policymakers need to act to prevent problems in emerging markets threatening global stability, the IMF has said.
In excerpts from its latest financial stability report the fund said:
The financial integration of emerging market economies into the global economy has affected international financial markets in both desirable ways—more efficient asset prices and resource allocation—and undesirable ones—amplification of shocks and transmission of excess financial volatility...
The significant growth in global capital flows due to mutual fund investments is also affecting the nature and size of financial spillovers from emerging market economies. The decision by mutual funds to sell investments in multiple countries in response to losses in one or more countries, or because of withdrawals by their own investors, is called the portfolio channel of contagion. This channel has gained in importance as a source of financial spillovers from emerging market economies to equity markets in recent years, in line with the increase in asset allocation to these countries. The impact from the portfolio channel from advanced economies remains significantly larger, according to the IMF.
The IMF says the influence of China will grow as it becomes more integrated into the global financial system:
The IMF research shows that among large emerging market economies, China is unique: news about its economic growth has an economically significant and rising impact on global equity prices. In the last five years alone, the impact of growth surprises from China on global equity prices has almost quadrupled. By contrast, changes in Chinese asset prices tend to have little effect on asset prices elsewhere.
“Purely financial spillovers from China are still very small, but likely to grow considerably as China gradually continues to integrate into the global financial system,” said Gaston Gelos, head of the Global Financial Stability Analysis Division at the IMF.
So policymakers need to act to safeguard financial stability in the wake of the growing importance of emerging markets:
“The evidence underscores the need for policymakers to take into account economic and policy developments in emerging market economies when assessing their own countries’ prospects,” said Gelos.
Enhanced international economic and macroprudential policy cooperation can also play an important role.
Other policy measures countries need to implement include:
• In emerging market economies, policymakers can foster the development of a domestic investor base to help dampen the effect of international financial contagion.
• As China’s role in the global financial system continues to grow, policymakers will need clear and timely communication of policy decisions, transparency about policy goals, and strategies to achieve them.
• The amplification of emerging markets’ financial impact on other countries due to corporate debt means policymakers should adopt measures to limit excessive increases in corporate debt that could threaten financial stability. Improving rules to limit systemic risks arising from mutual funds also remains important.
• Lastly, improving data on cross-border financial flows intermediated by banks, investment funds, and large institutional investors is a priority.
German industrial orders in surprise fall
German factory orders fell unexpectedly in February, according to figures from the economy ministry, hit by a decline in overseas demand.
They dropped 1.2%, the biggest monthly fall in six months and well below expectations of a 0.2% rise. Carsten Brzeski at ING Bank said:
German new orders dropped sharply in February, adding to evidence of continued stagnation in the German industry. New orders declined by 1.2% month on month, from an upwardly revised increase of 0.5% month on month in January. On the year, new orders were up by 0.5%. The last months have not been easy for the German industry. Since May last year, new orders have dropped in six out of ten months. Interestingly, the February drop was driven by falling foreign demand (-2.7% month on month), whole domestic demand picked up somewhat after a two-months slump.
Introduction: Markets await service sector reports
Good morning and welcome to our rolling coverage of the world economy, the financial markets and business.
Stock markets are under pressure again as the International Monetary Fund warned of the knock on effect from growing problems in emerging markets, and oil prices slipped again. Brent crude is down 0.3% at $37.57 a barrel, as hopes of a deal to curb production at this month’s planned meeting of producers continue to fade.
The Nikkei 225 is down 2.4%, while the Hang Seng is 1.4% lower. European markets are expected to open lower:
Our European opening calls:$FTSE 6133 down 32
— IGSquawk (@IGSquawk) April 5, 2016
$DAX 9732 down 90
$CAC 4316 down 29$IBEX 8529 down 69$MIB 17540 down 100
Investors will be keen to see the results of the latest services PMI data from Europe and the UK.
There was an improvement in the initial March estimates from France, up from 49.2 to 51.2, the best figures since before the Paris terror attacks last year. Expectations are for the final data to show an improvement, with better numbers also forecast for Spain, Italy and Germany.
However the recent attacks in Brussels could well have had an effect on sentiment. Michael Hewson, chief market analyst at CMC Markets UK, said:
Since these previous readings the Brussels terror attacks could well had an impact on sentiment, particularly in the travel and hotel sector, which has driven a lot of the improvement in the French numbers. There is a fear that events in Brussels could well have knocked confidence in a sector that appeared to be on the cusp of a fragile recovery. Today’s numbers could well be the first test of that sentiment.
In the UK, analysts will look for any signs that the recent Brexit headlines have hit sentiment. Hewson said:
Last month we saw the sector post its weakest reading since April 2013 at 52.7. Was this merely a blip or evidence of an element of caution as we head towards the summer vote? Expectations are for a decent end to the first quarter with an improvement to 54, from February’s 52.7.
