Darkening ‘global economic skies’ pull stocks lower

The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, Feb 7, 2019. (Reuters pic)

LONDON: Global stocks fell for a third straight day on Friday, and were set for their first weekly loss in seven, as investors worried about a broadening global economic slowdown and the lack of any sign of a resolution to the US-China trade row.

Safe-haven government bonds benefited, with the German 10-year bond yield falling closer towards 0% and the US 10-year Treasury yield hitting its lowest point in a week.

Weak earnings dragged on European stocks, with the pan-European STOXX 600 down 0.3% by early afternoon in London.

Stock markets in Asia eased, with MSCI’s broadest index of Asia-Pacific shares outside Japan shedding over 0.5%, retreating from a four-month peak touched the previous day.

The MSCI All-Country World Index, which tracks shares in 47 countries, was 0.3% lower, putting it on course to break a six-week streak of gains.

The European Commission on Thursday slashed its forecasts for euro eurozone growth this year and next, stoking concern that a global slowdown is spreading to Europe as businesses and investors grapple with trade frictions.

The Bank of England said on Thursday that Britain faces its weakest economic growth in a decade this year, as uncertainty over Brexit mounts and the global economy slows.

This week Australia’s central bank signalled monetary easing in the face of economic headwinds, joining the US Federal Reserve and the European Central Bank in indicating policy shifts. The Fed has all but abandoned plans for further rate hikes, while the ECB also sounded less certain that it will start tightening policy this year.

“If there was a single takeaway from the last few days it would appear to be this – ever since the Fed started to backtrack on its growth expectations for the US economy, the global economic skies, to coin an aphorism from the recent World Bank report, have started to darken further,” said Michael Hewson, chief markets analyst at CMC Markets in London.

In a report last month titled ‘Darkening Skies’, the World Bank said global economic growth is expected to slow to 2.9% in 2019, from 3% in 2018.

Hewson added that the tone in markets on the day wasn’t helped by remarks from US President Donald Trump’s chief economic adviser Larry Kudlow that US-China trade talks still had sizable differences to overcome.

Trump himself said on Thursday he did not plan to meet Chinese President Xi Jinping before a March 1 deadline set by the two countries to achieve a trade deal.

US Treasury Secretary Steven Mnuchin and US Trade Representative Robert Lighthizer are expected to kick off another round of trade talks in Beijing next week to push for a deal to protect American intellectual property and avert a March 2 increase in US tariffs on Chinese goods.

“The trade issue is more in focus in the short term. Macro data over the last few weeks hasn’t given any reason to be more concerned about a recession than a month or two ago,” said Paul Harper, equity strategist at DNB.

“The cycle is pretty mature now but it’s always pretty difficult to know how close to a recession you are when indications are not showing signs that it’s around the corner,” he added.

The 10-year US Treasury yield extended its overnight decline to hit a one-week low of 2.638%. The 20-year Japanese government bond yield dropped to a 27-month trough of 0.400%.

The 10-year German bund yield fell to 0.100% on Thursday, its lowest since November 2016 after the European Commission’s sharp cuts to growth and inflation forecasts.

The euro was on course for its biggest weekly loss in more than four months against the dollar, though traders seemed to be puzzled that it was finding support. The single currency was flat at $1.13370 after dropping to a two-week low of $1.1325 the previous day.

It was on track for a 1% weekly loss.

Against a basket of currencies, the dollar was 0.1% higher.

The Australian dollar was on course to end a bearish week firmly on the back foot, last trading down 0.3% at $0.7077.

The Aussie slid sharply on Wednesday after the Reserve Bank of Australia stepped back from its long-standing tightening bias, saying the next move in rates could just as well be down as up. The currency was headed for a weekly loss of 2.3%.

In commodities, oil fell, pulled down by worries over a global economic slowdown, although Opec-led supply cuts and U.S. sanctions against Venezuela provided crude with some support.

US crude futures slipped over 0.5% to US$52.31 per barrel, extending losses after dropping 2.5% in the previous session. Brent crude was flat at US$61.63 per barrel.