Global equity markets falter as Brexit approaches its endgame

Oil slips further on weaker economic outlook

LONDON, Oct 16, (RTRS): European equities opened lower and sterling came off five-month highs on Wednesday as the European Union and Britain resumed talks in Brussels to avert a disorderly Brexit before an EU summit on Thursday and Friday.

Hopes of a breakthrough lifted markets on Tuesday, but investors turned more cautious stance after looking for a deal during the night that never came. The pound was down 0.5% against the dollar with investors trading volatility levels not seen since the 2016 June Brexit referendum.

The pound had strengthened by close to 5% over the past week as investors rushed to reprice the prospect of a last-minute Brexit deal before the Oct 31 deadline. The panEuropean STOXX 600 retreated 0.3%. Britain’s domestically focused midcaps, a gauge of Brexit anxiety, fell 1%.

Earlier, shares rose in Asia. MSCI’s broadest index of Asia-Pacific shares outside Japan gained 0.5%. MSCI’s gauge of stocks across the globe was flat. “Even though we are most optimistic that a deal does happen,we don’t think the most likely outcome is that it happens by Oct 31, so you would be looking at some form of extension and potentially elections,” said, Andrew Sheets, chief cross asset strategist at Morgan Stanley. Thirdquarter earnings are expected to show an overall decline in earnings, which could also weigh on morale, Sheets said.

Morgan Stanley had a below-consensus view on how companies would fare this quarter, he said. Europe’s companies are struggling with uncertainties ranging from Brexit and the US-China trade war to Germany’s manufacturing recession. Companies listed on the STOXX 600 index are now expected to report a decline in third-quarter earnings of as much as 3.7%, worse than the 3% expected a week ago, according to I/B/E/S data from Refinitiv.

Bloomberg reported, citing sources, that China will struggle to buy $50 billion of US farm goods annually unless it removes retaliatory tariffs on American products, which would require reciprocal action by US President Donald Trump.

The US-China trade war will cut 2019 global growth to its slowest pace since the 2008-2009 financial crisis, the International Monetary Fund warned on Tuesday.

Global gross domestic product is now expected grow 3% in2019, the IMF said its latest World Economic Outlook projections, down from 3.2% in a July forecast, largely because of global trade friction. In commodities, Brent crude shed about 0.1 cent to$58.66 a barrel. US crude rose 10 cents to $52.91 after falling the day before over fears the trade war would keep squeezing the global economy. In emerging markets, Turkey’s Halkbank saw its shares and bonds plunge after US prosecutors charged the state-owned lender with taking part in a multibillion-dollar scheme to evade US sanctions on Iran.

A day earlier, Washington had imposed sanctions on Turkish officials, raised tariffs and halted trade talks after Turkey invaded northeastern Syria in a campaign again Kurdish fighters.

US

US stocks were flat on Wednesday as a raft of upbeat earnings reports underlined a solid start to third-quarter results, while concerns over an escalation in the US-China trade war and weak economic indicators lingered.

Wall Street came under pressure after the US House of Representatives on Tuesday passed legislation related to pro-democracy protests in Hong Kong, while data on Wednesday showed a fall in US retail sales for the first time in seven months in September.

However, investors cheered positive results from Bank of America, which rose 2.1% after beating analysts’ estimates for third-quarter profit.

PNC Financial Services Group Inc and Bank of New York Mellon Corp also rose after better-than-expected earnings.

The reports followed strong earnings on Tuesday from JPMorgan Chase & Co and Citigroup Inc, showing consumer confidence remained strong despite recession fears that have led businesses to pull back on spending and borrowing.

The S&P 500 bank sector gained 0.3% after hitting a one-year high on Tuesday.

Analysts have forecast the worst quarterly earnings season in nearly three years for S&P 500 companies, as domestic economic growth shows signs of slowing on the fallout from the tariff war with China.

Of the 43 S&P 500 companies that have reported earnings so far, 86% have topped Wall Street expectations, according to IBES data from Refinitiv.

Analysts expect market action to turn positive through the session, as optimism from solid earnings reports overshadows mixed political headlines.

Advancing issues outnumbered decliners by a 1.37-to-1 ratio on the NYSE and by a 1.20-to-1 ratio on the Nasdaq.

At 11:23 am ET the Dow Jones Industrial Average was down 13.72 points, or 0.05 percent, at 27,011.08, the S&P 500 was down 2.34 points, or 0.08 percent, at 2,993.34.

The Nasdaq Composite was down 19.22 points, or 0.24 percent, at 8,129.49, coming under pressure from a 3.6% fall in shares of Adobe Inc after Citigroup downgraded the Photoshop software maker.

Among other stocks, United Airlines was up 2.6% after the carrier raised its 2019 profit target.

UK

Sterling swung around five-month highs on Wednesday and stocks in London cut their losses amid a blizzard of contradictory headlines about whether Britain and the European Union were on the verge of agreeing a Brexit deal.

In another volatile day of trading for UK assets, financial markets remained hostage to news as British Prime Minister Boris Johnson and EU negotiators raced against the clock to forge a withdrawal agreement before an EU summit on Thursday.

Negotiators were struggling to clinch an 11th-hour deal, raising the chances that Johnson will have to seek an extension of the Oct 31 deadline for Britain’s exit from the bloc.

Sterling has surged some 5% since late last week, when London and Brussels restarted intense negotiations.

At 1540 GMT, sterling was up 0.5% at $1.2844, having earlier rallied to $1.2855, a new 5-month high, on optimism that the DUP was coming round to a deal.

Against the euro, the pound was 0.2% stronger on the day at 86.160 pence – but off five-month highs hit earlier.

Sterling trading volumes have surged in recent days. On Tuesday, investors bought and sold more pounds than on any single day since November 2018, according to Refinitiv data.

London-listed companies that make their cash at home, from house-builders to banks, on Wednesday reversed some of the ground gained since last week.

These domestically focused stocks, some of the world’s most unloved shares in recent years, have seen their fortunes transform since Friday – JPMorgan’s domestic basket has outperformed London-listed exporter peers and the bluechip FTSE 100.

Britain’s mid-cap stocks index FTSE 250 cut its losses from the morning and was last down marginally. Ireland’s main stocks index fell 0.5%.

Europe

European shares slipped on Wednesday, after closing at their highest level in more than a year, as London’s last-ditch Brexit talks with Brussels kept investors apprehensive about making brisk decisions. The pan-European STOXX 600 index was down 0.3%, after closing at its highest level since May 2018.

London-listed shares of Rio Tinto were among the biggest decliners on the STOXX 600, after the miner said its iron ore shipments rose 5%. But it cut its bauxite and alumina production forecast for the year.

Rio’s shares also took a hit from China iron ore plunging to a six-week low following a weak demand outlook.

The wider European mining sector was down 1.3%, while the financial services and retail sectors shed more than 1% on declines in British stocks.

In a bright spot, Volkswagen shares rose 1% as industry data showed European car registrations rose 14.4% in September.

Investor focus shifts now to Europe’s earnings season, which gets underway in earnest next week. Analysts expect an earnings recession to deepen as companies struggle with uncertainties around Brexit, a protracted US-China trade spat and Germany’s manufacturing recession.

Asia

Asian shares were mostly higher Wednesday after a Wall Street rally driven by healthy earnings reports from US companies.

Japan’s benchmark Nikkei 225 rose 1.2% to 22,476.70, while Australia’s S&P/ASX 200 gained 1.2% to 6,729.50. Hong Kong’s Hang Seng was unchanged at 26,505.95, while the Shanghai Composite index lost 0.3% to 2,982.74.

South Korea’s Kospi added 0.6% to 2,077.88 after the Bank of Korea announced it was cutting its benchmark interest rate by a quarter of a percentage point, to a record-low 1.25%.

Shares also rose in Taiwan and most of Southeast Asia. India’s Sensex added 0.1%.

Oil

Oil eased further below $59 a barrel on Wednesday, pressured by concerns about weaker demand for fuel due to slower economic growth and forecasts of a further rise in US crude inventories.

Prices gained some support due to signs from the Organization of the Petroleum Exporting Countries that further curbs to oil supply could come in December. OPEC and its allies meet on Dec 5-6 in Vienna to review output policy.

Brent crude, the global benchmark, slipped 7 cents to $58.67 a barrel by 1315 GMT. US crude gained 1 cent to $52.82.

“Prices are under pressure from increasing pessimism about the global economy and subsequent demand-side concerns,” Stephen Brennock of oil broker PVM said.

In a bearish signal for demand, the International Monetary Fund said on Tuesday the US-China trade war would cut 2019 global growth to its slowest since the 2008-2009 financial crisis.

“Prices remain under pressure,” said Craig Erlam, analyst at OANDA. “Oil inventory today from API may be notable albeit unlikely to have any major impact on the broader trend.”

The American Petroleum Institute (API) reports its weekly US inventory numbers at 2030 GMT, ahead of government stocks data. Analysts estimate US crude inventories rose by around 2.8 million barrels last week.

Optimism about an imminent Brexit deal had helped support the market, although this faded after EU sources said talks had hit a standstill and Ireland said there were still issues to be resolved.

Analysts have said any agreement that avoids a no-deal Brexit should boost economic growth and, in turn, oil demand. OPEC Secretary-General Mohammad Barkindo, meanwhile, has said an option for OPEC and its allies is to implement deeper cuts in oil production.

On Tuesday, Barkindo said OPEC would do what it could with allied producers to sustain oil market stability beyond 2020, in a signal the producers would continue to cooperate.

OPEC, Russia and other producers have a deal to cut oil output by 1.2 million barrels per day until March 2020.