Warning signs from stock rout
THE cascade in US stocks, leading to falls in Asia and Europe indexes, is a grim reminder to leaders not to play with fire where economies and markets are concerned.
Raising the cost alarm, heavyweights on Wall Street are warning of the impact of tariffs on their earnings.
US housing and auto sectors are hurt by rising rates, bank loans crimped by rising financing costs.
Big tax cuts and government spending, especially in defence, only provide a temporary boost to growth.
Economic slowdown has become a worry as more tariffs against China loom, more so in the event of a Republican sweep in the midterms, which may also see more spending, prompting further rate hikes.
Further tax cuts proposed by President Donald Trump may boost consumption but will increase the pressure on rates and the already high budget deficit.
In nominal terms, the US leads the world with about US$20 trillion in debt, representing a 31.8% share of global debt.
All this fiscal pumping has caused rates to rise at a pace that is viewed as “too fast.”
It has also caused the dollar to strengthen with several companies citing its impact on their earnings and outlook.
In this perfect storm, the selldown in US stocks this month is possibly the worst since the financial crisis.
The Dow Jones industrial Average is more than 8% off its record high of 26,828.39 on Oct 3, close to the correction level of 10%.
The S&P fell below its 200day moving average and is more than 10% below its intraday high of 2,940.91 on Sept 21.
Further confusion is caused by disagreement between Trump and Fed chairman Jerome Powell over rate hikes as red flags to the strong growth, appear.
“Hot air is coming out of the housing market,’’ said wolfstreet.com as sales of new singlefamily homes plunged 18% last month from a year ago, not seasonally adjusted, to only 41,000 houses.
The number of new unsold singlefamily houses jumped 16% last month from a year ago, not seasonally adjusted, to 331,000 houses, representing the highest number since January 2009, which was the middle of the housing bust.
In the US auto sector, major carmakers, except for Fiat Chrysler, recorded lower US sales in September.
Amidst the anticipated secondhalf slowdown, Automotive News said US light vehicle deliveries dropped 5.5% last month from a year ago.
US core durable goods orders for items lasting three years or more, slowed down sharply from 4.6% in August to just 0.8% last month.
This has raised concerns on the impact of trade war and market volatility on business sentiment.
Persistent public criticism by Trump of the Fed also leads to fears of negative repercussions as Fed officials seek to maintain their independence.
High risks taken in the US economy are being closely watched for their outcomes which some fear would turn negative.
Nine years into its economic expansion, Trump has pumped an estimated US$2 trillion into the economy, from tax cuts to increased government spending.
This large scale US trade war with China has not been experienced since the 1930s.
Even without signs of inflationary pressures, interest rates are being raised from the near zero levels kept since the financial crisis.
“Desperate times require desperate measures; such an approach often leads to bad outcomes,” said Pong Teng Siew, head of research at InterPacific Securities.
Citing the trade war, Pong sees the backlash against China as a “move in response to the desperation (in the loss in their lead in trade and possibly, in the future, technology) amongst a broad swathe of Americans.”
Trade concerns uttered in the past one year, are now realized with warnings from Caterpillar, Ford and 3M that their growth could be knocked off by tariffs and higher steel prices.
In fact, “US steel is costing more than anywhere else in the world,” Joe Hinrichs, Ford president of global operations, was reported as saying.
The strong dollar is negatively impacting the results of Anheuser-Busch, 3M, Illinois Tool Works, United Parcel Service and PPG Industries.
Earnings grew 22% in the third quarter but S&P index companies just beat analyst estimates by nearly half of that in the first quarter.
With oversold markets not bouncing back, could fears extend beyond just slowdown to systemic financial conditions or recession.
“The continued plunge of the US stockmarket, for which price to earnings ratio is 50% above its historical average, will cause a broad-based correction in global equities; Asian markets will not be spared from the negative spillover,” said Lee Heng Guie, executive director of Socio Economic Research Center.
Leaders should not aggravate the situation through wrong moves that send the global economy into further tailspin.