LCG Market Rundown: Tata and Skanska exemplify growth fears – Jasper Lawler, Head of Research.

 

3:25pm GMT | February 8th 2019

Equity indices overall were lower on Friday. A varied set of indicators flashing signs of slowing global growth were enough to unnerve investors. The huge reversal in industrial production during December in the Netherlands, a record loss from Tata Motors and a dividend cut from global construction giant Skanska were some signs of a weaker global environment that caught our eye. The economic growth concerns piled on top of the negative trade headlines. The interpretation of Donald Trump’s one-word ‘No’ reply to whether he plans a meeting with Xi Jinping, was that is bodes ill for a US-China trade deal getting signed before the March 1 deadline.

Bond markets may be a better place to look for global growth concerns that could easily spill over into equities. Speculation that China will drag global growth lower this year has seen demand for government bonds in New Zealand push 10-year yields to a record low. The RBNZ meet next week, and if the lowered growth forecasts from the RBA are anything to go by, look likely to push back plans for a rate hike into 2020.

UK blue chip shares spent the day attempting to claw back yesterday’s losses. This week the FTSE 100 failed to overcome the 7200 level that it last reached at the end of October, and went on to give up half its February gains. Home builder shares jumped on hopes the firms might be expected to fill the void left by England’s local authorities, half of which are missing new homes targets.

German shares fell while government bonds rose in a flight to safety over global growth fears. The DAX index added on Friday, to a sharp weekly reversal just short of the 11400 level and its 20-week average price.

Wall Street opened lower on Friday, in an extension of the sharp losses felt the previous day. There’s a risk that US-China trade talks move from a positive to negative catalyst for US equites. With only three weeks to go until the March 1 deadline, US Treasury Secretary Mnuchin and team need to produce something tangible in their trip to China next week.

Speaking of deadlines. We expect the US government may well be in shutdown again as of next week, but not for long. The wall (or physical barrier) is a symbolic victory that Nancy Pelosi and House Democrats will be determined to deny President Trump before the 2020 election. Ultimately, we think Trump probably backs down and accepts a water-down deal. With his usual bluster, Trump can claim the increased spending on border security is simply the first step in the right direction of his ‘big beautiful wall’.

The US dollar has made a comeback in the past few days. The buck’s status as a haven overcame the Fed’s dovish U-turn. We see the dollar strength continuing because while the Fed may have moved out of ‘autopilot’, the US economy as exemplified by the blowout December NFP report supports tighter monetary policy.

The euro stabilised after some better than expected German trade data on Friday. The euro went from the top to the bottom of its 1.13-1.15 price range this week after a slew of disappointing data, notably from Germany. Our Q1 forecast is that the euro finally breaks down below 1.13. If Q4 GDP data on Thursday next week shows Germany has officially tipped into a technical recession, that could be the catalyst for a sub-1.13 euro.

The British pound will finish a difficult week off its lows. Traders are caught in the middle of Theresa May’s unfruitful meetings with European leaders, including Ireland’s PM Leo Varadkar today and Mark Carney leaving a possible rate hike on the table at the February Bank of England meeting.

Oil prices stabilised somewhat on Friday but remain overall under pressure from the threat of slowing global demand in combination with talk of higher production out of Libya. The impact of growing Libyan production should be fleeting but the rising US crude inventories and record production reported this week will be more durable. With supplies elevated and OPEC seemingly politically hamstrung, oil will be vulnerable if we switch back to a risk-off market environment.

Gold remains comfortably in an uptrend with traders buying this week’s dip on Friday. The threat of a new US government shutdown, deteriorating trade relations and a broad move into havens all bode well for precious metals but a further rebound in the dollar is the biggest potential headwind. We are optimistic for gold but $1300 per oz could be a line in the sand for whether it suffers another round of capitulation selling.

Contact: Jasper Lawler, Head of Research

Twitter: @jasperlawler

Email: jasper.lawler@lcg.com

Tel: 0207 456 7086

Available via Globelynx

 

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About the author

Jasper delivers regular commentary, seminars and webinars on market news, trading analysis, strategy and psychology. He is regularly interviewed by BBC News, Bloomberg, CNBC and Sky News, and has featured in The Times, Guardian and Daily Telegraph. Jasper hosts a weekly charting analysis webinar. He is qualified as a Chartered Market Technician (CMT) with the Market Technician Association, and has a degree in Finance and Economics.