October 11, 2018 / 7:49 AM / 2 months ago

Daily Briefing: Trade tensions dampen German outlook

LONDON (Reuters) - IMF chief Christine Lagarde stepped up warnings on the perils of trade and currency wars at the Fund's annual meeting in Bali overnight, describing them as a lose-lose for all concerned.

Traders work on the floor of the New York Stock Exchange, October 10, 2018
"We certainly hope we don’t move in either direction of a trade war or a currency war. It will be detrimental on both accounts for all participants. And there would also be lots of innocent bystanders"

That may be confirmed in the updated growth forecasts for Germany due to be released this morning, which according to leaks to Reuters will be downgraded.

The government now expects the economy to grow by just 1.8 percent this year and next, down from previous predictions of 2.3 percent and 2.1 percent respectively. It views an escalation in the global trade dispute as the main risk for the future of the economy.

As European Union chief negotiator Michel Barnier calls for a big push on Brexit talks at next week's summit, the Northern Ireland DUP is threatening to vote down next year's UK budget if its red lines on the Irish border question are crossed.

Despite Downing Street attempts to play down the significance of such a defeat, budget votes have traditionally been seen as votes of confidence in the government. The budget is due on October 29.

MARKETS AT 0655 GMT

Without any obvious news trigger on the day at least, Wall Street stocks had their worst day in at least eight months with losses of more than 3 percent, the tech-laden Nasdaq had its biggest drop in more two years and volatility gauges surged.

While it was hard to pin the shock on a specific development on Wednesday, the list of culprits is long – the escalating Sino-U.S. trade wars and the related Chinese slowdown, fear of capital flight and tech sector troubles there; U.S. interest rate rises and a rise in 10-year Treasury yields to their highest in more than seven years during the past week; and multiple stresses in emerging markets that have seen the IMF cut world growth forecasts and warn of a “plateauing” of the world economy.

The release of U.S. inflation numbers later on Thursday and the start of the third-quarter U.S. earnings season tomorrow may have caused additional trepidation but are hardly tipping points in themselves, not least with annual U.S. profit growth expected to come in in excess of 20 percent again. The political backdrop in the United States may be a worry ahead of mid-term congressional elections.

If you wondered if world’s largest economy was in safe hands, President Donald Trump described the Federal Reserve as “crazy” on Wednesday night for continuing to raise interest rates. Crazy or not, Trump won’t want Wall Street in a major correction going into the congressional polls and so eyes will now shift to whether Washington’s tone on trade tariffs may start to soften as a result. S&P500 futures point to further losses later on Thursday.

The turbulence on Wall Street ripped across world markets nonetheless, with China’s CSI300 down more than 5 percent for the first time since February 2016. Tokyo’s Nikkei lost almost 4 percent and the tech-heavy Taiwan equity index was down more than 6 percent.

On course for its worst month in more than six years, MSCI’s emerging-market equity benchmark dropped more than 3 percent in its worst day since June 2016.

European stocks dropped more than 1 percent at the open. U.S. Treasury yields back off the week’s highs. The dollar fell against the yen and euro. But emerging-market currencies were under the cosh, not least China’s offshore yuan, which fell to its weakest since mid-August. India’s rupee fell to another record low.

Sterling gave up some of the week’s gains on optimism Britain and the European Union could be close to a Brexit deal going into next week’s EU summit, but amid worries about whether UK PM Theresa May could convince Ulster unionists and all her own party to back it.

— A look at the day ahead from European Economics and Politics Editor Mark John and EMEA markets editor Mike Dolan. The views expressed are their own —

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