With global trade war fears compounded by new U.S. tariffs on Europe, the Brexit standoff and mounting signs of an industrial recession including the United States and Germany, world stock markets took fright on Wednesday and are on course to record one of their worst weeks in about two months.
The World Trade Organization ruling over illegal Airbus subsidies gave the United States a green light to lift tariffs on $7.5 billion of European Union imports – a list of goods that includes everything from aircraft to cheese and whiskey.
Although widely expected, the planned U.S. tariff rises intensify the transatlantic trade row and is likely to bring retaliation — the WTO will rule on similar subsidies to Boeing in a few months.
When U.S. manufacturers are starting to feel the heat from the U.S.-China trade war as much as other manufacturers around the world, and the escalation of the trade war with Europe just increases the anxiety.
The European economy is also bracing for the risk of a no-deal Brexit at the end of this month. New and reportedly final proposals from the UK on Wednesday are widely expected to be rejected by Brussels, even if they will spend a few days considering changes to an existing proposal for the Irish border.
With one eye on the coming third-quarter earnings season, euro zone stock indices dropped almost 3% on Wednesday, their worst day of the year. A 3.2% drop in Britain’s FTSE100 was the biggest loss since the Brexit referendum in 2016.
U.S. indices then dropped more than 1% in their worst day for about six weeks, as the impeachment inquiry against President Donald Trump and fears for the September employment report due tomorrow adding to the angst.
The selling continued through Asia overnight; Tokyo and Seoul fell about 2%, and although Shanghai is closed all week, attention is now shifting to the resumption of formal trade talks between Washington and Beijing next week.
MSCI’s all-country index of world stocks had its worst day since Aug. 14 yesterday and continues to drop, with cumulative losses of about 2.5% for the week — now the worst since the first week of August.
Recession worries are also feeding speculation of further rate cuts by the Federal Reserve. Futures markets now put the chances of a cut later this month at 75%. Ten-year U.S. Treasury yields fell below 1.6% for the first time since Sept. 9 and inversion of the yield curve between three months and 10 years grew to about 25 basis points.
U.S. and European stock futures were slightly firmer first thing, however, in a sign of some stability returning. Growth fears and data showing inventory building saw Brent crude oil prices slide back below $60 per barrel.
Currency markets were quieter on Thursday, with safe-haven yen gains reversed and the dollar strengthening again after Wednesday’s recoil. Sterling was weaker as markets awaited a formal response from the EU to the new UK Brexit proposals. Emerging-market currencies gained.
In corporate news, the Trump administration’s 10% tariffs on European-made Airbus and 25% duties on French wine, Scotch and Irish whiskies, and cheese from across Europe take effect on Oct. 18. Early indications are the duties are in line with expectations or in some cases even better, given some exemptions.
One trader sees Airbus shares rising 2% at the open after heavy losses yesterday, saying the U.S. tariffs are not as bad as feared and noting that the new U.S. list spares some Airbus parts. Safran shares are also seen up, but Thales down.
Campari shares could fall and Pernod Richard rise. Traders also say luxury names could find support after they were left off the tariffs list, although tensions in Hong Kong remain a problem for them. One trader sees LVMH rising 2% at the open.
In the UK, a profit warning is set to hit Ted Baker hard. Imperial Brands is in focus after news that its chief executive will step down. In earnings, H&M, the world's second-biggest fashion retailer, reported its first quarterly rise in pretax profit in over two years and said efforts to meet rapid changes in its industry were on track. Its shares are seen rising 1%.
— A look at the day ahead from EMEA markets editor Mike Dolan. The views expressed are his own —