August 30, 2019 / 8:15 AM / 3 months ago

Daily Briefing: August may end well, but it's been a bruising month

World stocks are set to close August on an upbeat note, with MSCI's global index at a one-week high. Most Asian markets are in the black, Europe is opening higher and Wall Street futures are also up.

The German share price index DAX graph is pictured at the stock exchange in Frankfurt, August 29, 2019

But the worsening outlook for trade and clear signs of world growth is slowing, possibly verging on recession, have weighed heavily on markets this month. World shares and New York’s S&P 500 are on track to snap a two-month winning streak, losing 3% and 2% respectively.

And the reason for today’s cheer looks somewhat fragile. President Donald Trump asserted that trade talks with China would resume on Thursday, raising hopes that the 5% additional tariff increase on $300 billion of Chinese goods might not kick in on Sept. 1 after all.

China said a September round of meetings was being discussed, though it stressed Washington needed to cancel the tariff hike. Chinese shares gave up earlier gains to trade little changed, possibly on expectations that weekend data would paint a gloomy picture.

The yuan, which had snapped a 10-day losing streak on Thursday, has resumed its slide, and is on course for its biggest monthly decline since 1994, having shed around 3.7% to the dollar.

Currency markets overall seem a lot more downbeat than equities – the risk-on Aussie dollar slipped a quarter percent towards 10-year lows following weak data and on expectations the trade war is hitting the economy of China, its main trade partner.

The dollar rose to a one-month high against the euro and the currency basket after the renewed trade hopes – a possible reflection of how keenly markets are watching for the impact of the trade war on the U.S. economy. It fell against the yen, which is set for a 2% rise in August.

Japan’s Nikkei is up around 1%, but the outsize stock market performer of the day is South Korea, up almost 2% after the announcement of a fiscal stimulus package.

It’s been a month to remember for bond bulls, with U.S. 30-year yields slumping 60 basis point, their biggest one-month fall since 2011.

In the euro zone, every bond market now except Greece saw yields on 10-year bonds fall to less than 1%. Today though, U.S. 10-year Treasury yields are up from a three-year low of 1.443% touched earlier this week.

Bund yields are flat. Italy is capping the month with 10-year yields around 1%, also off record lows but on track for a third month of 50 bps-plus declines in 10-year rates. Italy's stock market has jumped 4% this week so far, celebrating the fact its politicians have managed to avert a snap election.

But if Italian political problems are laid to rest for now, the noise around Brexit Britain continues with parliament returning from recess next week. Sterling is holding around $1.22, but British stocks are headed for their worst month since August 2015, having shed some 5%.

For today, all eyes are on inflation. Euro zone inflation is not expected to pick up in August, especially after yesterday’s poor German CPI reading. July’s headline inflation came in at a three-year low of 1% and core inflation was 0.9%. The decline in energy prices this month may have brought inflation down even further.

The United States will post personal consumption expenditure (PCE) deflators, the Fed’s preferred inflation gauges. Japan’s factory output surprised to the upside today, but retail sales fell. That could set off alarm for a world economy sustained so far by consumer demand, which has bucked the contraction in manufacturing.

Focus is shifting now to China’s weekend data. Its official manufacturing survey will provide a gauge of the impact from the Sino-U.S. trade war. It’s expected to show Chinese factory activity contracted for the fourth straight month in August, a Reuters poll showed.

European stock markets are extending yesterday’s gains that saw benchmarks end the day close to one-month highs. The market is always just one Trump tweet away from a turn in the mood, the gains are fragile on the last trading session of the month, before a long U.S. holiday weekend, with the latest round of U.S. tariffs on China goods hitting on Sunday.

Disappointing retail sales from Germany will also stir worries that the slowdown in manufacturing may now be hurting consumer spending in Europe’s biggest economy.

It’s been a rocky month for European stocks. This week’s gains, fuelled by China trade hopes and the ending of Italy’s three-week political crisis, have helped markets recoup most of the ground lost in early August.

All the major markets are in the red this month except for Switzerland, though. August is typically one of the weakest months of the year as investors leave for summer holidays, but even so the FTSE 100 is heading for its worst monthly performance since before the Brexit vote.

In corporate news this morning, Italian-American industrial vehicles maker CNH Industrial, is considering a possible spin-off of its truck unit Iveco as part of a wider reorganisation plan. Its shares are expected to rise 5% on the news.

Norwegian industrialist John Fredriksen says he is seeking investors to take larger stakes in his companies, which include oil-tanker firm Frontline, dry-bulk shipper Golden Ocean, rig owner Seadrill and fish farmer Mowi. He may relinquish control of operations as part of a plan to reduce his workload.

German consumer goods companies Beiersdorf and Henkel may come under pressure after U.S. rival Ulta Beauty reported weaker-than-expected results and warned on fiscal-year profits. Its shares sank as much as 22% in after hours trading.

Ferrexpo shares are expected to fall after a review of the use of funds it donated to a charity in Ukraine concluded that some of the money may have been misappropriated. One dealer says the shares will fall 3%.

Emerging-market stocks climbed to a one-week high for a fourth day of gains, helped by the hopes U.S.-China trade relations will improve. But developed-market currencies struggled, on track for their worst month in since May 2012, as China’s yuan headed for worst month in more than two decades. Russia’s rouble softened 0.2% and South Africa’s rand and Turkey’s lira both weakened.

Argentina’s peso steadied on Thursday after a bruising week, and more market reaction is likely after S&P slashed the country’s credit rating by three notches and declared the government’s plans to extend maturities unilaterally constitutes a default.

— A look at the day ahead from Sujata Rao, deputy EMEA markets editor. The views expressed are her own —

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