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| The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, January 2, 2019 |
World shares began 2019 on a downbeat note, oil prices and bond yields skidded lower and the Japanese yen strengthened on Wednesday as data from China to France confirmed investors’ fears of a global economic slowdown.
The US S&P500 and Dow Jones index futures slipped around one per cent and Nasdaq futures fell 2 percent, signalling Wall Street would open in the red on the first trading day of the New Year after closing 2018 with the worst annual loss since 2008.
Weak manufacturing-activity surveys across Asia were followed by disappointing numbers in the eurozone, sending MSCI’s index of world shares 0.4 per cent lower.
China in particular was in focus, after factory activity contracted for the first time in over two years. The gloom continued in Europe, where the Purchasing Managers’ Index for the euro zone reached its lowest since February 2016. Future output PMIs were at a six-year low .
The data suggests there will be no respite for equities or commodities after the 2018 losses.
A pan-European share index recovered some losses to stand 0.6 per cent lower. The Paris bourse led losses with a 1.4 per cent fall, as France’s PMI fell in December for the first time in two years.
“It’s a continuation of the worries over growth. You can see them in the Asian numbers, which all confirm that we have passed peak growth levels,” said Tim Graf, chief macro strategist at State Street Global Advisors.
The knock-on effects from China’s slowdown and global trade tensions were rippling across Asia and Europe, he said.
“I don’t think the trade story goes away, and Europe, being an open economy, is still vulnerable,” Graf added.
Copper, a key gauge of world growth sentiment, fell to 3 1/2-month lows , while Brent crude futures lost almost 1 per cent after shedding 19.5 per cent last year .
Commodity currencies’ losses were led by the Australian dollar. Often used as a proxy for China sentiment, the Aussie fell as much as 0.7 per cent to its lowest since February 2016 .
There were also renewed fears in Europe over the clean-up of Italy’s banks, with trading in shares of Banca Carige suspended. Carige failed last month to win shareholder backing for a share issue that was part of a rescue plan. An index of Italian bank shares fell 2.5 per cent.
SAFETY FIRST
The stock market rout drove investors into the safety of bonds. Ten-year German Bund yields slumped to 20-month lows of 0.16 per cent, their biggest one-day fall in two years.
Gold and the yen benefited too.
While gold topped six-month highs, the yen extended its rally against the dollar to seven-month highs around 108.9 . It strengthened to 19-month peaks against the euro .
“Traditional safe-haven type flows are going into the yen. As we see increased volatility (on world markets), Japanese (investors) are probably repatriating foreign assets,” said Charles St Arnaud, senior investment strategist at Lombard Odier Investment Managers.
However, the dollar edged up 0.3 per cent against a basket of currencies, rising half a per cent to the euro and 0.8 per cent versus sterling.
The greenback is under pressure from a fall in US Treasury yields as investors wager the Federal Reserve will not raise rates again. While the Fed itself still projects at least two more hikes, money markets imply a quarter-point cut by mid-2020.
Fed Chairman Jerome Powell may comment on the outlook when he participates in a discussion on Friday, while manufacturing and jobs data due Thursday and Friday should also shed light.
Yields on two-year debt have tumbled to 2.49 per cent from 2.977 per cent peak in November. Ten-year yields dived to their lowest since last January at 2.647 per cent.
The spread between two- and 10-year yields has in turn shrunk, narrowing last month to the smallest since 2007 and heading towards an inversion which has portended recessions in the past.
The German 2-10 yield curve is the flattest since November 2016
“What is clear is that the global synchronised growth story that propelled risk assets higher has come to the end of its current run,” OCBC Bank told clients.
“Inexorably flattening yield curves … have poured cold water on further policy normalisation going ahead.”
