Mar­ket turmoil ex­poses wider fears about growth

Ir­ish mar­ket now down 24 per cent on its 2018 high point

The Irish Times - Business - - BUSINESS NEWS - Cliff Tay­lor Anal­y­sis

Real con­cerns about the out­look for eco­nomic growth next year lie be­hind the lat­est heavy hit to in­ter­na­tional shares, with the Dublin mar­ket among those which suf­fered heav­ily.

The ar­rest of a se­nior ex­ec­u­tive in Chi­nese mo­bile com­pany Huawei in Canada was widely cited as a fac­tor in the share price falls in­ter­na­tion­ally – and it cer­tainty fo­cused at­ten­tion on the dan­gers of a trade war be­tween the US and China.

But big moves on gov­ern­ment bond mar­kets – which re­flect the out­look for in­ter­est rates – show wider fears that the big in­ter­na­tional eco­nomic ex­pan­sion which has sup­ported share prices since after the crash may fi­nally be com­ing to an end.

The heavy across-the-board fall in Ir­ish shares yes­ter­day, with a drop of over 3 per cent in the Iseq in­dex, was a re­ac­tion to in­ter­na­tional mar­kets and not at­trib­ut­able to any spe­cific do­mes­tic fac­tor, ac­cord­ing to deal­ers in Dublin.

Hefty

How­ever, the Ir­ish mar­ket is now a hefty 24 per cent down on its high point for 2018, reached early in the year, a big­ger fall than the 12-16 per cent typ­i­cally seen on Euro­pean mar­kets.

The fear of the im­pact of Brexit may be one fac­tor here. Ir­ish shares are still some 17 per cent ahead on a five-year view, but the lat­est hit will take its toll on in­vest­ment port­fo­lios and pen­sion funds.

Of­ten when mar­kets are get­ting edgy about the gen­eral out­look and share val­u­a­tions, a spe­cific event fo­cuses their at­ten­tion.

The ar­rest of the chief fi­nan­cial of­fi­cer of Huawei, Meng Wanzhou, in Canada and the fact that the US is seek­ing her ex­tra­di­tion due to charges re­lat­ing to Ira­nian sanc­tions has fo­cused at­ten­tion on one of the risk fac­tors – a trade war be­tween the US and China.

Al­ready the world’s two big­gest economies have ex­changed tit-for-tat tar­iffs – spe­cial taxes on the im­ports of the other party – as pres­i­dent Don­ald Trump seeks changes in Chi­nese trade prac­tices.

The mar­kets took heart when the US pres­i­dent and his Chi­nese coun­ter­part agreed at a G20 sum­mit last week­end to avoid fur­ther tar­iffs for 90 days and en­ter ne­go­ti­a­tions on a range of trade and se­cu­rity is­sues.

The ar­rest has added to fears that this deal will quickly fall apart, with Bei­jing re­act­ing fu­ri­ously to the move.

A deep­en­ing trade war be­tween the US and China would hurt both coun­tries – US farm­ers have al­ready been hit by Chi­nese tar­iffs on soy­beans, while the US tar­iffs on $250 bil­lion (€220bil­lion) of Chi­nese goods is also tak­ing its toll.

There is also a shaky truce be­tween the US and EU on trade, but fears re­main that this could also break, with the US pres­i­dent re­peat­edly threat­en­ing tar­iffs on Euro­pean cars, a par­tic­u­lar threat to Ger­many.

Ger­many’s in­flu­en­tial eco­nomic in­sti­tutes have warned that an all-out trade war with the US could push Europe into re­ces­sion.

Un­der­ly­ing all of this are wider fears about the out­look for global growth.

The US econ­omy is en­ter­ing record ter­ri­tory in terms of the length of an eco­nomic ex­pan­sion.

The fact that growth has not been par­tic­u­larly strong had led to hopes that it can keep go­ing, but re­cent in­di­ca­tors have been mixed and a no­table change in the out­look for US in­ter­est rates sug­gests that in­vestors are now hav­ing doubts about the out­look.

In­ter­est rates

After an ex­pected in­ter­est rate rise from the US Fed­eral Re­serve in De­cem­ber, mar­ket in­ter­est rates now sug­gest an ex­pec­ta­tion that there may – or may not – be one fur­ther rise next year, rather than the two pre­vi­ously an­tic­i­pated.

EU growth is also slow­ing and gov­ern­ment bond in­ter­est rates – in­clud­ing Ir­ish rates – are also fall­ing again.

Un­less EU growth picks up doubts will grow over whether the Euro­pean Cen­tral Bank (ECB) will be able to in­crease in­ter­est rates next au­tumn, as it has sig­nalled it hopes to do.

As well as trade fears, a man­u­fac­tur­ing slow­down is in­creas­ing fears about the euro zone out­look, as – of course – is the un­cer­tainty caused by Brexit.

As of­ten hap­pens when con­fi­dence is shaky, any news can spark a sell-off.

Talk that an Opec oil pro­duc­tion cut may not be enough to re­store oil prices was taken as a rea­son to sell en­ergy shares rather than as good news for in­fla­tion and other com­pa­nies which use oil as an in­put.

Money is flow­ing from riskier as­sets such as shares into safe havens, such as US and Ger­man gov­ern­ment bonds, where prices rose, send­ing yields down­wards.

It is un­usual to see such a rapid change in the con­fi­dence about the growth out­look – and this is re­flected in the big fall in share prices. Given the broad-based na­ture of the fears, this one prob­a­bly has a way to run.

‘‘ Ger­many’s in­flu­en­tial eco­nomic in­sti­tutes have warned that an all-out trade war with the US could push Europe into re­ces­sion

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