The European market (Stoxx-600) closed around 386.14 Tuesday; slumped almost -0.35% on the concern of renewed Trump trade war (with the EU) and subdued growth forecast by the IMF. Earlier the Stoxx-600 made an 8-months high of 389.10 (since Sep’18) on soft and smooth Brexit optimism as the EU’s chief Brexit negotiator Barnier said the EU is ready for (long) Brexit delays, although the length depends on British argument (justification for any long delay). The market is now expecting a long 1-year Brexit delay (March’2020) in the line of Tusk’s “flextension” as Theresa May dashed to Berlin and Paris to beg for a further extension.
Although, the EU is clearly divided between Merkel (soft/dovish) and Macron (hard/hawkish) camp, at the same time, it can’t handle a no-deal hard Brexit for possible economic disruption as various EU banks are closely associated with the UK and Germany has a significant export trade relation with Brittan. Thus, Germany can’t afford another disruption in its economy after the US-China trade and auto emission jitters.
As a result, Merkel is trying her best to ensure that the UK either stay in the EU by abandoning the Brexit idea eventually (by extending long Brexit extension) or leave orderly with a deal (smooth Brexit), so that it's a trading relationship with the UK does not disrupt in any way. In fact, German hesitation for a no-deal hard Brexit is now Theresa May’s biggest advantage (leverage) and thus she is still playing the great “Brexit games of chickens” by reminding the adverse effects of a cliff-edge Brexit to both the EU and the British Parliament. The EU is clearly blinking first despite endless British political circus in this Brexit saga.
On Tuesday, the European market sentiment was also supported by the EU-China trade deal optimism as the EU and China presented a united stance against Trump’s bellicose trade policies by reaffirming comprehensive strategic partnership with a post-summit joint statement in Brussels attended by the European Commission President Juncker, European Council President Tusk, and Chinese Premier Li.
The EU apparently achieved a diplomatic win over the US in the push for China to pursue fairer trade policies. The joint statement signaled important Chinese concessions over curbing subsidies to domestic industries and facilitating market access for foreign companies. The wording about the two issues helped salvage the leaders’ communique after the EU withdrew a veto threat, enabling both sides to show unity for the multilateral trading system (globalization) against of Trump’s “America First” and bellicose trade policies.
The EU said both sides reaffirm the strength of their Comprehensive Strategic Partnership, their resolve to work together for peace, prosperity and sustainable development. The two sides also affirm their commitment to multilateralism, the respect for international law and fundamental norms governing international relations, with the UN at its core. The two sides committed to upholding the UN Charter and international law, and all four pillars of the UN system, namely peace and security, development and human rights.
In brief, the EU and China pledged their joint commitment to maintaining rule-based orders, including WTO reform to counter Trump trade tantrum, making a united stance as both are a victim of Trump trade war. Also, bilateral talks will be set up for removing industrial subsidies. Both the sides promised to have no forced transfer of technologies as the price for investment. And both commit to creating a level playing ground.
China’s Premier Li promised that Beijing will no longer force foreign firms to share sensitive know-how when operating in China and was ready to address industrial subsidies. Li also assured that: “China to continue improving the business environment and market access for foreign companies in a non-discriminatory way. China is to keep opening its domestic economy”.
On Tuesday, the European market came under stress on renewed Trump trade war tensions as Trump is set to escalate global trade war by considering imposing tariffs on a range of EU products from large commercial aircraft to dairy products and wine, from helicopters to some motorcycles. “Tariff man” Trump’s anti-EU move may be accelerated by the EU-China joint statement, which has a veiled reference to his bellicose trade protectionist policies.
On late Monday, the USTR has floated the idea of slapping tariffs on $11B worth of products from the EU. The move could escalate trade tensions between the US and EU, is retaliation to European civil aircraft Airbus subsidies after the WTO said that the subsidies have an adverse impact on the US company Boeing (NYSE:BA).
The USTR Lighthizer said: “This case has been in litigation for 14 years, and the time has come for action. The Administration is preparing to respond immediately when the WTO issues its finding on the value of U.S. countermeasures. Our ultimate goal is to reach an agreement with the EU to end all WTO-inconsistent subsidies to large civil aircraft. When the EU ends these harmful subsidies, the additional U.S. duties imposed in response can be lifted”.
Trump tweeted early Tuesday: “The World Trade Organization finds that the European Union subsidies to Airbus have adversely impacted the United States, which will now put Tariffs on $11 Billion of EU products! The EU has taken advantage of the U.S. on trade for many years. It will soon stop!”
After Trump’s bellicose tweet, confirming his intention for a trade war with the EU, Germany’s export savvy DAX-30 slips and Airbus tumbled. The EU may also put retaliatory tariffs on the US goods and Boeing. The global economy, especially the EU and China has suffered significant slowdown along with the US for the US-China trade conflict and thus the EU as-well-as the whole world can’t afford another Trump trade war. As China trade talks are now almost towards an “end game” (deal or no deal), Trump will now turn his focus on the EU from trade to defense spending.
The USTR Proposes Products for Tariff Countermeasures in Response to Harm Caused by EU Aircraft Subsidies:
“The World Trade Organization (WTO) has found repeatedly that the European Union (EU) subsidies to Airbus have caused adverse effects to the United States. Today, the Office of the United States Trade Representative (USTR) begins its process under Section 301 of the Trade Act of 1974 to identify products of the EU to which additional duties may be applied until the EU removes those subsidies”.
“USTR is releasing for public comment a preliminary list of EU products to be covered by additional duties. USTR estimates the harm from the EU subsidies as $11 billion in trade each year. The amount is subject to arbitration at the WTO, the result of which is expected to be issued this summer”.
“In line with U.S. law, the preliminary list contains a number of products in the civil aviation sector, including Airbus aircraft. Once the WTO arbitrator issues its report on the value of countermeasures, USTR will announce a final product list covering a level of trade commensurate with the adverse effects determined to exist”.
The Airbus said the WTO is to determine the amount, not by the US exaggerations. The Airbus spokesman Ohler criticized the US has no legal basis take action against EU on its subsidies and necessary measures have been taken to comply with relatively minor elements following the May 2018 WTO report. Additionally, Ohler said the $11B amount the US claimed was “largely exaggerated” and should be “defined by the WTO”, not the US.
The Airbus spokesman Ohler said in a series of tweets on Tuesday:
“On the publication of draft US measures against the EU, Airbus states: “We don’t see any legal basis for this. Airbus has taken the necessary measures to comply with the relatively minor elements that remained following WTO report of May 2018 (6% out of all Boeing’s claims)”.
“Regarding Airbus subsidies, the amount is largely exaggerated and in any case will be defined by the WTO and not the US. By contrast, the ruling only last week shows no willingness at all on the Boeing side to comply and confirms they are clearly in contravention with WTO rules. The adoption expected this week of this last WTO report regarding Boeing should allow the EU to start sanctions proceedings with even greater countermeasures. All this is leading to unnecessary trade tensions and shows the only reasonable solution in this long trade dispute is a settlement which is something we have said since the beginning”.
Elsewhere, as per reports, the EU may be preparing its retaliation tariffs on Boeing subsidies. Although there was no immediate official response from the EU regarding the US intention to impose Section 301 tariffs as retaliation for Airbus subsidies, the EU believed US measures were “greatly exaggerated” and the amount of retaliation could only be determined by a WTO arbitrator.
Meanwhile, the EU is reportedly preparing for possible retaliation over subsidies for Boeing. The report also suggested that in the parallel of the Boeing dispute, the determination of EU retaliation rights is also coming closer and the EU will request the WTO-appointed arbitrator to determine the EU’s retaliation rights.
Later, the EU said in an e-mailed statement: “In the parallel Boeing dispute, the determination of EU retaliation rights is also coming closer and the EU will request the WTO-appointed arbitrator to determine the EU’s retaliation rights. The commission is starting preparations so that the EU can promptly take action based on the arbitrator’s decision on retaliation rights in this case”.
“The commission believes the $11 billion figure proposed by the US is significantly higher than the WTO would allow. The EU is confident that the level of countermeasures on which the notice is based is greatly exaggerated; the amount of WTO-authorized retaliation can only be determined by the WTO-appointed arbitrator. The figure quoted by the USTR is based on U.S. internal estimates that have not been awarded by the WTO”.
Reiterating its stance from 10 years ago, before the lingering legal battle over aircraft subsidies was put before the WTO by the US, the commission said it would be willing to negotiate a settlement with the US: "The EU remains open for discussions with the US, provided these are without preconditions and aim at a fair outcome”.
This state subsidy is a vital issue between the US and China also. The proposed US tariffs would be imposed in addition to existing levies on European products. And this may be another serious threat to the global economy in 2019, beside the current US-China trade conflict. Trump trade war began in 2018 when the US started slapping tariffs on the imports of steel and aluminum from a number of countries, including the EU. The EU also responded by imposing levies on the €2.8B worth of US goods in June later that year.
In March (2019), Trump threatened more tariffs on the EU goods, including 25% on cars imported from the EU, unless they manufacture in the US. Currently, the US and the EU are in a symbolic handshake deal (between Trump and Juncker in H2-2018), subject to speedy negotiations. But there were no serious negotiations as the EU is basically trying to buy time as Trump & Co is busy with China negotiations.
Trump is now basically trying to keep his bellicose tariffs intact, even after a handshake/tentative/comprehensive trade deal with China and other nations as an average $5B per month, is at least helping him to reduce the surging US fiscal deficit, especially after his tax cut stimulus, which failed to stimulate the US economy in a meaningful way as earlier expected. Thus, Trump is taxing the US public at one hand through his tariffs being paid by the US consumers/importers, while he is offering some tax cuts on the other hand.
China may not agree to sign a trade deal with the US, in which Trump tariffs be not removed on the excuse of China’s “poor enforcement” record. For China, the worst is over as per Trump tariffs are concerned and it now has great leverage in the form of Trump’s Dow addiction and constant tweets (on China trade deal optimism) as Trump measures everything with respect of the US stock market.
Thus in a no China deal situation, the US market bound to plunge again (both for sentimental and fundamental reasons) and Trump can’t afford a plunging stock market ahead of his 2020 Presidential election bid. As a result, Trump is bound to blink first in this war of attrition on trade with China.
On Tuesday, the European as-well-as German market tumbled further soon after Trump tweet on IMF downgrade of the global economy coupled with Eurozone as-well-as Germany and the US. As highly expected (earlier indicated by the IMF chief Lagarde a few days ago), the IMF has downgraded global GDP growth rate for 2019 to 3.3% from prior 3.6% (actual-2018) and an earlier estimate of 3.5% (Jan). This is the slowest global growth forecast by the organization (IMF) in a decade (since 2008 GFC), primarily on the US-China (Trump) trade war and lingering Brexit uncertainty.
The IMF primarily sees Trump trade war tension, Chinese slowdown, German auto emissions and Brexit uncertainty as for the main issues behind the current European/German woes.
The IMF also slashed the US GDP growth estimate for 2019 to 2.3% from prior 2.9% (actual-2018) and January estimate of 2.5%, while cut the same for the Eurozone to 1.3% from 1.8% (actual-2018) and an earlier January forecast of 1.6%. For China, the IMF cuts the GDP growth prospect to 6.3% from 6.6% (actual-2018), but marginally higher than an earlier January projection of 6.2% for 2019. The IMF cuts Germany significantly to 0.8% from 1.5% (actual-2018) and January estimate of 1.3%.
For some other important countries, for 2019, the IMF actually upgrades India to 7.3% from 7.1% (actual-2018), but it’s lower than the Jan forecast of 7.5%; cuts Canada to 1.5% from 1.8% (actual-2018) and Jan forecast of 1.9%; cuts France to 1.3% from 1.5% (actual-2018) and Jan forecast of 1.5%; cuts Italy significantly to 0.1% from 0.9% (actual-2018) and Jan estimate of 0.6%. The IMF sees total global trade volume growth at 3.4% against a prior forecast of 4.0%. The IMF actually downgraded almost all the major/EM economies for 2019 from their actual GDP growth in 2018 except India (7.3% vs 7.1%) and Brazil (2.1% vs 1.1%).
The IMF now sees the global growth to stabilize in H2-2019, followed by a gradual recovery in 2020. The IMF now sees the global GDP growth improved to 3.6% in 2020 (vs 3.3% projection in 2019) based on EM recovery, while for the US, actually cut it further to 1.9% on fading Trump fiscal stimulus (against 2019 forecast of 2.3%). The IMF also cuts China for 2020 to 6.1% (against 2019 forecast of 6.3%). The IMF sees better Eurozone GDP growth at 1.5% in 2020 from their 2019 forecast of 1.3% (actual 1.8% in 2018), while for Germany it was at 1.4% in 2020 (vs 0.8% forecast in 2019; actual 1.5% in 2018).
The IMF noted Trump trade war, Chinese deleveraging, EU stress (Argentina, Turkey), German auto disruption (tighter emission rules) and Fed’s dual QT as primary reasons for the sudden reversal of the global economy from synchronized expansion to contraction within a year.
As per IMF, almost 70% of the global economy could be under a slowdown in 2019. The IMF now sees a recovery in the global growth from H2-2019 supported by probable QE-4 by the Fed, relaunch of QE by the ECB (may go to MRIP; TLTRO-3 already announced), the evergreen BOJ QQE (may go to NRIP), Brexit fatigued BOE and the PBOC/China monetary/fiscal stimulus. The IMF also hopes about the US-China trade truce, which would immensely help the global recovery (as Trump almost pushes the global economy towards a recession singlehandedly).
The IMF also urged for a coordinated global policy response to prevent a doomsday-like a scenario, if required (global QQE-like Shanghai accord in 2015). Although the IMF sees better GDP growth for the global economy in 2020 based on some stressed EM prospect, the assumption has significant downside risk because of some EM vulnerability (Argentina, Turkey). The IMF also sees a stable global growth of around 3.5% post-2020 primarily on the strength of China and India. Basically, the IMF now sees China and India are the two main pillars of global growth after 2020.
As risks, the IMF sees lingering Trump trade war, Brexit uncertainty, EM vulnerability (stronger USD, higher bond yields). Surprisingly, the IMF does not mention higher oil as a potential risk for many EM economies along with higher USD (high oil CAD).
In any way, on Tuesday, the European market was dragged by Airbus and its suppliers (like Safran (PA:SAF), Leonardo, and Rolls Royce (LON:RR)) as a result of Trump trade tantrum. Techs were also under stress led by SAP on analysts’ downgrade amid lack of top management stability and business policy uncertainty. Energies dragged as oil tumbled on Putin’s talk down effort coupled with the concern of lower demand after IMF downgrade of the 70% of the global economy. Banks were in slight green on some recovery in Bund yields and on hopes of a dovish hold by the ECB. Automobiles were also under stress as Europe/Germany is more affected rather than China due to Trump trade war.
On Tuesday, Germany’s DAX-30 plunged -0.94% to close around 11850.57, right on the session low; earlier it made a high of 11988.53. Germany was dragged by techs, industrials and basic resources, while helped by chemicals.
France’s CAC-40 slumped -0.65% to close around 5436.42, at the session low; earlier it made a high of 5491.85. France was dragged by industrials (led by Airbus woes), utilities, consumer services, and goods, while helped by media and banks & financials to some extent.
Italy’s FTSE MIB-40 slips -0.46% to close around 21671.78, near the session low of 21611.37; earlier it made a high of 21898.03. As per reports, Italy could raise its 2019 fiscal deficit target to 2.4-2.5% from an earlier agreed figure of 2.04%. Italy’s populist government may also follow Trump tax cut by planning a 15%-20% income tax brackets to stimulate the economy, which is poised to grow by only +0.1% in 2019. Subsequently, Italian Bund yields (BTP) surged and banks dragged the overall market.
Britain’s FTSE-100 slumped -0.35% to close around 7425.57, almost at the session low of 7413.27; earlier it made a high of 7477.62 in a day of moderate volatility, following ongoing rollercoaster move in the GBP amid Brexit drama. The UK market was dragged by industrials, energies (lower oil), homebuilders (lingering Brexit uncertainty) and utilities (possible general election in the one-year Brexit extension and nationalization as per Labor policy).
On mid-Wednesday, the Stoxx-600 is almost flat on hopes of a dovish hold by the ECB (with some stimulus) to fight Trump trade war tensions. The ECB may come out or indicate with some favorable TLTRO-3 terms & conditions. The market was also getting support on hopes of a smooth and soft or no-Brexit at all amid a possible 1-year “flextension” to be provided to “Great Brittan, the great player in the political games of chickens”
.Technical View (DAX-30, CAC-40, MIB-40, and FTSE-100): To be updated soon
Technically whatever may be the narrative, DAX-30 has to sustain over 11850 for a further rally to 11930*/12055-12105/12220 and 12285/12450-12600/12650 in the near term (under bullish case scenario).
On the flip side, sustaining below 11835-11750/11670*, DAX-30 may fall to 11500*/11395-11275/11200 and further 11150/11000-10850/10770 in the near term (under bear case scenario).
Technically whatever may be the narrative, CAC-40 has to sustain over 5475 for a further rally to 5515/5555-5605*/5675 and 5715-5855 in the near term (under bullish case scenario).
On the flip side, sustaining below 5450-5400/5330*, CAC-40 may fall to 5295/5235-5200/5170* and further 5140/5100-5070/4995 in the near term (under bear case scenario).
Technically whatever may be the narrative, MIB-40 has to sustain over 21050 for a further rally to 21315*/21485-21615*/21745 and 21925/22070-22200/22375* in the near term (under bullish case scenario).
On the flip side, sustaining below 21000/20890-20750*/20600, MIB-40 may fall to 20500/20450*-20325/20225 and further 20100/19950-19890*/19800 in the near term (under bear case scenario).
Technically whatever may be the narrative, FTSE-100 has to sustain over 7305 for a further rally to 7350*/7440-7520/7600 and 7715-7885 in the near term (under bullish case scenario).
On the flip side, sustaining below 7285, FTSE-100 may fall to 7170/7110-7025/6995 and further 6950*/6925-6865/67885 in the near term (under bear case scenario).