The European market (Stoxx-600) closed around 347.72 Friday, slumped by almost -0.49% on the concern of European growth and political jitters, lower oil and lingering US-China trade truce suspense. The market was under stress on subdued global cues amid US political jitters, muted China economic data. The risk-on sentiment was also under stress early Friday Asian session after a report that Trump inauguration spending is under criminal investigation by federal prosecutors.
European stocks were also under stress as Eurozone December manufacturing PMI expanded at the slowest pace over 2-years and Eurozone November new car registrations declined for the third month. As a result, EU/German automakers were in stress coupled with reports of weak China auto sales. But EU auto stocks also recovered to some extent after China formally said it will remove the retaliatory 25% tariff on automobiles imported from the US for three months starting 1st Jan’2019.
As a reminder, a few days ago, China has proposed to reduce tariffs on imported automobiles from the US to 15% from the current 40% as a part of G20 temporary trade truce between US and China. The original China auto tariffs on US as-well-as all other countries are at 15%, but China increased the same for US autos as a part of retaliatory tariffs on Trump’s $34B China tariffs at additional 25%.
But in an interview late Thursday, Trump said he would seek further reductions in the tariff China charges on the US-made automobiles: “It’s not acceptable, 15 (%) is still too high”.
As per China’s official confirmation on Friday, it will reduce the tariffs on US autos from 40% to 15% (to return to original tariff) effective from 1st Jan’19 and will last for 90-days in line with Trump’s commitments to withhold higher China tariff on $267B at 25% (also for 90-days from 1st Dec). Thus China is also following tit-for-tat relief/tariffs as per Trump’s action.
China will not reduce its common 15% auto tariffs for the US autos unilaterally; it will reduce the same for all other autos exported from other countries too as per WTO norms. Thus the US auto players will be at a level playing ground with automakers from all other countries. As a result, overall auto shares optimism after the China tariffs reduction news were quite limited.
Also, weaker-than-expected Chinese economic data on November industrial production and retail sales show signs of slower China growth and weighed on stock prices. The subdued China retail sales were mainly a function of muted automobile sales as a result of slowing consumer credit and clamp down on shadow banking/P2P lending. In any way, overall subdued EZ and China economic data, looming threat of US bond yield curve inversion/US slowdown amid lingering Trump trade war tensions and European political tensions (Brexit, Italian/French budget and growing yellow vests protests across France and other EZ) are affecting the global growth concern and the risk-on sentiment.
Energies also underperformed as oil tumbled almost 3% on weak China economic data and higher USD. China is the World’s biggest oil importer and the lingering concern of Chinese economic slowdown because of Trump trade war and certain other China-specific domestic factors are affecting the overall oil sentiment. Techs also dragged the market on lingering China trade/cold war jitters.
Germany’s export savvy and auto heavy Dax-30 slumped -0.54% despite lower EUR and closed around 10865.77 after making a session low-high of 10733.75-10903.39. Dax-30 was dragged by techs, industrials, autos, and consumer & cyclical stocks.
France 40
France’s CAC-40 tumbled -0.88% and closed around 4853.70 after making a session low-high of 4822.89-4873.16 on subdued PMI data, a downgrade of GDP growth, increasing of the fiscal/budget deficit and political populism amid growing “yellow vests” protests against Macron admin. It was further dragged by techs, industrials, and healthcare. Overall, CAC-40 plunged by over -12% from Oct’18 till date, primarily for “yellow vests” protests across France, which is now turned into an anti-establishment movement not only in France but also in other Eurozone states and affecting EUR/EU/GE Bund yields and in turn banks & financials.
Italy 40
Italy’s FTSE MIB-40 slid -0.72% and closed around 18910.79 after making a session low-high of 18734.42-18968.26. It was dragged by a deluge of subdued economic data and lingering concern of the budget saga.
As per a report, the difference between the EC/EU budget deficit and that of the Italian DBP is now around 0.25%; i.e. the EC is still insisting for the 2019 Italian budget deficit around 1.80%, considering Italy’s latest proposal of 2.04%. The budget deficit differences between the EC and Italy is now around EUR 4.00-4.50B even after Italy slashed its 2019 budget deficit projection from earlier 2.40% to 2.04%.
The major part of this deficit is due to the huge amount (subsidy) involved in citizen’s income (EUR 9B) and pension reform (EUR 7B). As per a report, Italy’s debt grew to EUR 2.334T in October from 2.331T sequentially, while GDP growth was muted, which is also bad for the debt/GDP ratio.
On Friday, Italy’s PM Conte was in Brussels for the EU/Brexit summit and said his government is still working (negotiating) to complete proposal on the revised budget. Conte said “Italian government is asking the EU flexibility on the budget for infra investments to prevent or fight natural disasters (like recent devastating Italian flood, a bridge collapse) and for justice reform. And thus the talk with EU/EC will continue until a compromise is found. I am confident there will be a positive solution on talks with the EU over the budget and by this weekend, I hope to reach a deal with the EU”.
Conte also assured that the Italian government has never considered the option of leaving the Euro, but clarified that Italy has no margin (space) to reduce the 2019 budget deficit below the latest proposal of 2.04%, if this implies changing of welfare and pension spending plans and thus Italy has to reach a compromise with the EU over 2.04% budget deficit proposal. Conte further assured that over next 3 years debt will ‘be under control’ and the deficit will fall to below 1.5% of GDP.
Later, Italy’s cabinet undersecretary Giorgetti said if the current government fails, Italy should go to early elections. Italy’s deputy PM Salvini, the man in actual charge along with Di Maio is reportedly resisting more cuts to pension reform.
Italy's deputy PM Di Maio said “negotiations with the EU over 2019 budget deficit still underway, the government will not have to cut its reforms and all promises made to citizens will be kept, Italy is not surrendering to the EU. There is no need to clash with the EU given budget had accounted for more funds for reforms than actually needed”.
On Friday, Italy’s 10Y Bund Yield was almost flat around 2.96%, while Germany’s 10Y Bund yield was at around 0.26% and the Italy/German spread now stands around 270 bps, considerably lower than the recent high of around 335 bps on hopes of an Italian budget truce, but the budget saga is not over yet and we could see more dramas in the weekend/days ahead.
The UK’s FTSE-100 slips -0.47% and closed around 6845.17 after making a session low-high of 6788.65-6877.50 in a day of moderate volatility on lingering Brexit uncertainty as the EU rejected Theresa May ’s request for providing a legal guarantee for the Irish backstop solution. The UK market was also under stress on weak China economic data and a slump in oil, negative for miners/materials and energies. Also, home builders, consumer stocks and banks & financials dragged the market on Brexit and China slowdown worries.
GBPUSD plunged to a low of 1.2530 as Theresa May fumbled to secure a soft Brexit deal from the EU despite her dramatic and sentimental approach. Overall it now seems that Theresa May’s strategy is to create maximum pressure on the EU to provide the backstop concessions, she is seeking; otherwise, the UK will have to go for a no-deal hard Brexit, negative for the EU image also.
At the same time, Theresa May is also keeping the UK Parliament and her own party critics either to accept the present Brexit deal or face a no-deal hard Brexit or no-Brexit at all. Theresa May’s advantage is that no one from her conservative party is ready to lead the country in such difficult Brexit days and thus she survived the no-confidence vote.
GBP is also under stress on Brexit uncertainty after Theresa May survived her leadership challenge for another year. A surviving Theresa May could mean no more revocation of Article-50 (no-Brexit), but more uncertainty as the current Brexit Plan may not be passed in the UK Parliament even on 21st Jan unless the same is substantially improved by the EU, but that is also very unlikely.
GBP may now recover only under two conditions; i.e. a soft Brexit deal or no-Brexit at all. But both of these options are looking remote now as public support is now clearly more visible for a clean Brexit and nothing else, which the EU is unwilling to provide for any possible spillover effect across the Eurozone. A cherry picking Brexit could be a serious question mark over the concept of the Euro itself for its domino effect.
GM
GM closed around 35.10, edged down by almost -0.03%. GM, the largest US auto manufacturer was under stress amid ongoing Trump tantrum and China auto sales slowdown.
Talking about GM, its recent controversy of closing three manufacturing plants in the US and one in Canada, and subsequent retrenchment of a significant number of employees (-14K), Trump already blasted the GM CEO earlier and threatened to compel GM to pay back all the bailout packages it received after the GFC and subsidies including on electric vehicles. On Thursday, Trump again criticized GM plan to cut jobs and said the automaker won’t be "treated well."
Trump warned the GM CEO Barra: "I think she’s making a big mistake. I don't like what she did, it was nasty. It doesn’t really matter because Ohio is under my leadership from a national standpoint. Ohio is going to replace those jobs in like two minutes. To tell me a couple of weeks before Christmas that she's going to close in Ohio and Michigan, not acceptable to me. General Motors (NYSE:GM) is not going to be treated well”. Trump also turned his focus on GM's plan to focus on electric cars, predicting that "all-electric is not going to work."
In commodities, Copper (March-19) closed around 2.753, tumbled by almost -0.51% on China slowdown worries, increasingly weak economic data from the Eurozone and higher USD. Copper is the bellwether for global growth and it’s down almost 17% from the recent high of 3.297 scaled in June’18 on the concern of slowing global economic growth from China, Japan, EU, and the US, which could affect the demand for the materials in the industrials, construction, and manufacturing. China accounted for almost 50% of global metals demand and Trump trade tensions and subsequent weak economic data is affecting the overall industrial metal demand.