Equities drop on doubts over trade truce, worries of slackening growth

Oil rises as investors anticipate OPEC production cuts

NEW YORK, Dec 4, (Agencies): A key gauge of world equity markets fell on Tuesday as hopes faded for a speedy resolution to the US-China trade spat, while a flattening Treasury yield curve sparked recession warning signs that weighed on the US dollar.

Two-year Treasury yields rose above those of longer-dated 5-year notes overnight for the first time since the start of the financial crisis in January 2008, signalling to some investors an approaching US economic slowdown.

MSCI’s gauge of stock markets across the globe shed 0.90 percent, while the pan-European STOXX 600 index lost 0.76 percent.

Bond market jitters added to a weak start on Wall Street.

The Dow Jones Industrial Average fell 255.16 points, or 0.99 percent, to 25,571.27, the S&P 500 lost 29.41 points, or 1.05 percent, to 2,760.96 and the Nasdaq Composite dropped 94.53 points, or 1.27 percent, to 7,346.98.

The US dollar sagged as Treasury yields fell, adding to concerns the Federal Reserve could pause in its ratehike cycle.

The greenback, which started the week on a weak footing as the apparent thaw in trade tensions between the US and China cooled demand for the safe-haven currency, extended its fall as investors worried about the inversion of the short end of the US yield curve in bond markets.

The dollar index, tracking the unit against six major world currencies, fell 0.12 percent, with the euro down 0.08 percent to $1.1343. The dollar fell half a percent against the offshore yuan to 6.8441, its weakest since September.

Sterling rose after a senior European Union legal adviser said Britain could unilaterally withdraw its Brexit notice, easing investors concerns about Britain crashing out of the bloc in March without a deal.

Oil prices surged, extending gains ahead of expected output cuts by producer cartel OPEC and a reduction in Canadian supply.

Brent crude oil jumped by $1.89, or 3 percent, to a high of $63.58 before slipping back to trade around $62.25, up 56 cents by 1425 GMT. US light crude was last up 20 cents at $53.15 after earlier gaining more than 3 percent to an intraday high of $54.55 a barrel.

US

Banks led Wall Street lower on Tuesday, as a decline in US bond yields set off warning lights about slowing growth, while industrial and technology stocks fell on skepticism over the chances of a breakthrough in the US-China trade talks.

Following a rally on Monday after Washington and Beijing agreed to a three-month truce to iron out their trade differences, the three major indexes pulled back about 0.8 percent as some US Treasury yields inverted.

The curve between three-year and five-year Treasury notes and between two-year and five-year notes inverted on Monday - the first parts of the Treasury yield curve to invert since the financial crisis, excluding very short-dated debt.

Analysts expect the two-year, 10year yield curve - seen as a possible precursor to a recession - to follow suit. The spread has already narrowed to its lowest in over a decade.

“While interest rate hikes have sent short-dated yields higher, tepid inflation and slowing economic growth expectations have kept longer-dated yields pinned down,” said Michael O’Rourke, chief market strategist at JonesTrading in Greenwich, Connecticut.

“It’s a signal we’re getting closer to (full) inversion but we’re still a fair distance from it. It’s something to note ... something to be aware of but there’re other facts in play.”

The KBW Bank index slid 2.83 percent, with Bank of America Corp and Citigroup Inc dropping about 3 percent each. The overall S&P financial sector dropped 2.13 percent.

The S&P technology sector fell 1.13 percent, while industrials dropped 1.98 percent. Both sectors tend to react the most to trade news and led the market’s gains on Monday after the SinoUS trade truce.

Trade bellwethers Boeing Co and Caterpillar Inc weighed the most on the Dow, while Apple Inc, one of Monday’s leaders, pressured the S&P and the Nasdaq.

Apple dropped 2.1 percent as supplier Cirrus Logic Inc trimmed its revenue outlook, adding to growing evidence of tepid iPhones sales.

At 11:30 am ET the Dow Jones Industrial Average was down 206.86 points, or 0.80 percent, at 25,619.57, the S&P 500 was down 0.81 percent, at 2,767.66 and the Nasdaq Composite was down 0.98 percent, at 7,368.41.

Luxury home builder Toll Brothers Inc dropped 2 percent and weighed on its peers after reporting its first fall in orders in over four years due to higher interest rates and home prices.

Declining issues outnumbered advancers for a 2.26-to-1 ratio on the NYSE and a 2.44-to-1 ratio on the Nasdaq.

The S&P index recorded 37 new 52week highs and five new lows, while the Nasdaq recorded 34 new highs and 70 new lows.

The US stock and bond markets will be closed on Wednesday to mourn the death of former US President George H.W. Bush.

Europe

European shares fell on Tuesday led lower by auto stocks as investors started to question whether the truce agreed by the United States and China on their trade dispute would lead to a long-term deal.

After enjoying a rally for its first day of trading in December, Germany’s DAX - the most sensitive to China and trade war fears - fell 1.1 percent, while the broader pan-European STOXX 600 index declined 0.8 percent.

The European automotive sector, which is most sensitive to trade war fears, was the biggest sectoral faller, down 1.7 percent. Shares in German carmakers Volkswagen, Daimler and BMW fell between 1.6 and 3 percent.

The tech sector was also a big loser, down 1.4 percent. Chipmakers, which are also heavily exposed to China and trade, sustained heavy losses with AMS down 5.1 percent, Siltronic down 8.1 percent.

Top faller on the STOXX 600 was IG Group, down 9.7 percent, after the British online trading platform forecast a drop in first half 2019 revenues as it suffered from newly-introduced limits on ordinary individuals making highly-leveraged financial bets.

French catering group Elior sank 8.6 percent after cutting its sales growth outlook, and Belgian postal services firm Bpost plunged 22.8 percent after a profit warning.

France’s JCDecaux fell 2.9 percent after Exane BNP Paribas reinitiated its coverage of the stock with an “underperform” rating.

Energy stocks gave up earlier gains as crude prices came off highs on worries that demand would stall due to a Sino-US trade war, and that Russia remained a stumbling block to a deal to cut global crude supply.

BP however rose 0.9 percent and Royal Dutch Shell ended flat.

German industrial gases group Linde will replace British bank Barclays on the leading index of panEuropean stocks STOXX Europe 50, STOXX Ltd, the operator of Deutsche Boerse Group’s index business, said.

The change comes as part of the quarterly reshuffle and will be effective at the opening of European trading on Dec. 24, STOXX said on Monday. Linde shares rose 2.1 percent and Barclays was down 2.6 percent.

Asia

Asian markets mostly dropped Tuesday as the previous day’s euphoria over the China-US trade war ceasefire gave way to questions about whether the two can ultimately resolve their differences.

Tokyo tumbled 2.4 percent on profit-taking and a strong yen, while Sydney and Singapore shed one percent each. Seoul dropped 0.8 percent, while Taipei eased 0.5 percent and Wellington gave back 0.1 percent.

However, Hong Kong staged a late rally to end up 0.3 percent, while Shanghai, Manila and Jakarta were also up.

Key figures around 0820 GMT - Tokyo - Nikkei 225: DOWN 2.4 percent at 22,036.05 (close)

Hong Kong - Hang Seng: UP 0.3 percent at 27,260.44 (close)

Shanghai - Composite: UP 0.4 percent at 2,665.96 (close)

Dollar/yen: DOWN at 113.10 yen from 113.59

Oil

Oil prices rose on Tuesday, extending gains ahead of expected output cuts by producer cartel OPEC and a reduction in Canadian supply.

Brent crude oil jumped by $1.89 or 3 percent to a high of $63.58 before slipping back to trade around $62.25, up 56 cents by 1425 GMT.

US light crude was last up 20 cents at $53.15 after earlier gaining more than 3 percent to an intraday high of $54.55 a barrel.

Both benchmarks climbed by around 4 percent on Monday after US President Donald Trump and Chinese counterpart Xi Jinping agreed at a meeting of the Group of 20 industrialised nations (G20) to pause an escalating trade dispute.

However Saudi Oil Minister Khalid Al-Falih said it was too soon to be certain that OPEC and other oil exporters would cut production because the terms of a deal remain unresolved.

It added that it expected a joint effort by OPEC and Russia to withhold supply to push Brent oil prices “above the mid-$60 per barrel level”.

Helping OPEC in its efforts to rein in emerging oversupply was an order on Sunday by the Canadian province of Alberta for producers to scale back output by 325,000 bpd until excess crude in storage is reduced.

OPEC’s biggest problem is surging production in the United States, where output - mostly from its southern shale fields - has grown by about 2 million bpd within a year to more than 11.5 million bpd.

Barclays bank said in a note to clients that oil production in Texas alone “reached 4.69 million bpd in September, compared with Iraqi output of 4.66 million by our estimates”.

Iraq is OPEC’s second-biggest oil producer behind Saudi Arabia.

Currencies

The dollar fell broadly on Tuesday as US Treasury yields slipped, feeding fears that the Federal Reserve could pause in its rate-hike cycle, while an inversion in part of the yield curve was taken as a red flag for a potential recession.

The dollar, which started the week on a weak footing as a thaw in trade tensions between Washington and Beijing sapped demand for the safe-haven greenback, extended its fall as investors fretted about an inversion of the short end of the US yield curve in bond markets.

The curve between US three-year and five-year Treasury notes and between two-year and five-year notes inverted on Monday - the first parts of the Treasury yield curve to invert since the financial crisis, excluding very short-dated debt.

Analysts expect the two-year, 10year yield curve - seen as a predictor of a US recession - to follow suit.

While interest rate hikes have sent short-dated yields higher, tepid inflation and slowing economic growth expectations have kept longer-dated yields pinned down.