On 06 July, 2017 – Global stocks retreated on geopolitical concerns and hawkish central bank comments

Investors were looking to the G20 meeting report over the weekend.
United States
US stocks followed European and Asian shares lower after disappointing labor market data clashed with the prospect of a more hawkish Federal Reserve. The rising tensions in the Korean peninsula provided additional pressure. A renewed sell-off in government bonds unnerved investors which in turn sent US stocks lower. The Dow Jones industrials were down 0.7 percent while the S&P retreated 0.9 percent and the Nasdaq dropped 1.0 percent.
According to the ADP private payroll release for June, private employers added 158,000 jobs. This was below the estimated gain of 180,000 and suggested a cooling in the labor market as it nears full employment. Weekly jobless claims were up for a third consecutive week. The softer data followed the FOMC minutes from its June meeting indicating that policymakers were split on the inflation outlook going forward.
Also released today was the ISM non-manufacturing index for June. The ISM said the index rose to a better than anticipated 57.4 in June from 56.9 in May, with a reading above 50 indicating growth in the service sector. Exports were up and imports were down producing a narrower international trade deficit in May. The Commerce Department said the trade deficit narrowed to $46.5 billion from $47.6 billion in April.
Tesla dropped after the electric carmaker’s Model S did not receive the top score in certain tests by the Insurance Institute for Highway Safety. General Electric was lower after the European Commission accused the company of providing misleading information during a merger deal. L Brands tumbled after June sales came in below expectations.
These data reflect observations at 4:00 PM US ET. Gold at the afternoon London fixing was up US$4.60 to US$1,224.90. Copper futures were virtually unchanged at US$2.66. WTI spot crude was up 16 US cents to US$45.29. Dated Brent spot crude was up 9 US cents to US$47.88. The US dollar was up against the Australian dollar. The currency declined against the euro, pound and Swiss franc. It was unchanged against the yen and the Canadian dollar. The Dollar Index was down 0.4 percent. The yield on US Treasury 30 year bond was up 5 basis points to 2.90 percent while the yield on the 10 year note was up 4 basis points to 2.37 percent.
Europe
European markets declined in Thursday’s session — investors had their first opportunity to react to the minutes of the most recent meeting of the Federal Reserve, which were released after the European close yesterday. The Fed plans to reduce its balance sheet but failed to provide a specific timeline to begin the process. And today, the European Central Bank published its minutes of its most recent meeting. The FTSE was down 0.4 percent, the CAC declined 0.5 percent, the DAX lost 0.6 percent and the SMI was 0.7 percent lower.
The ECB said that there was a need to maintain caution in communication as underlying inflation was still subdued and substantial monetary policy stimulus was necessary to support the ongoing euro area recovery. The ECB cautioned that even small and incremental changes in the communication could be misperceived as signaling a more fundamental change in policy direction. “This could trigger unwarranted movements in financial conditions, which could put the prospects of a sustained adjustment of inflation at risk.” While vanishing tail risks justified the dropping of the downward bias on interest rates, the move “only signaled that, given the current outlook and risk assessment, from the present perspective a further rate reduction had become unlikely.”
Commerzbank advanced on a Bloomberg report that Cerberus Capital Management is weighing a plan to purchase a stake in the lender. Axel Springer declined after Reuters reported that the media group is in exclusive talks to buy TV channel Sport1 from Constantin Medien. Sodexo declined after the facilities management company delivered a weaker than expected third-quarter. Reckitt Benckiser dropped after it warned of falling revenues following last month’s global cyber attack.
Associated British Foods rallied after the conglomerate upgraded its full-year outlook after reporting double-digit growth at its Primark clothing chain during the 40 weeks ended 24 June 2017. Homebuilder Bovis Homes slipped after reporting first-half trading in line with expectations. Budget airline easyJet was down despite reporting improved passenger traffic and load factor for June. Novartis declined while Roche retreated after a broker downgrade. Nestlé also finished lower. Banks including Barclays, Royal Bank of Scotland and Lloyds gained since they would benefit from higher interest rates.
Germany’s factory orders recovered in May driven by a rebound in foreign demands. Factory orders were up a monthly 1 percent only partly reversing a revised 2.2 percent drop in the previous month.
Asia Pacific
Asian stocks were mostly lower Thursday as oil prices resumed their decline and minutes from the Federal Reserve’s June FOMC meeting indicated that there was a lack of consensus among members over when to start reducing the Fed’s securities portfolio. Fed officials were determined to continue raise interest rates even with muted inflation levels, but they were divided on the future pace of interest rate increases. Investors also were waiting for news from this week’s G20 summit and Friday’s jobs report.
The Nikkei and Topix lost 0.4 percent and 0.2 percent respectively thanks to a stronger yen and geopolitical tensions on the Korean peninsula. Banks Mizuho Financial, Mitsubishi UFJ Financial and Sumitomo Mitsui Financial were down after the FOMC minutes failed to provide clarity around the Fed’s next move on rates and its plans to trim bond portfolio. Lawson shares tumbled after the convenience-store operator reported a drop in first-quarter operating profit. Construction companies in the Kyushu region soared after torrential rain devastated parts of the island.
Both the S&P/ASX and All Ordinaries were 0.1 percent lower with banking stocks succumbing to selling pressure after the Federal Reserve’s policy minutes lacked a consensus on future policy moves. The big four banks were down along with energy majors Oil Search, Origin Energy and Santos. Australia posted a seasonally adjusted merchandise trade surplus of A$2.471 billion in May.
The Shanghai Composite was up 0.2 percent after strong gains in resource stocks. However, the Hang Seng retreated 0.2 percent. The Kospi was virtually unchanged as auto stocks continued to slide in the wake of a diplomatic row between Beijing and Seoul and investors waited for Samsung Electronics to release its second-quarter earnings guidance on Friday. The Sensex was up 0.4 percent on hopes of strong quarterly earnings.
Looking forward
Germany, France and the UK post May industrial output. Germany, France and the UK report May merchandise trade balances. Canada releases its June labour force survey. The US releases its June employment situation report. The Federal Reserve will publish its semi-annual Monetary Policy Report to Congress in advance of Chair Janet Yellen’s testimony on July 12 and 13 to the House of Representatives and Senate. The Group of 20 meets in Hamburg, Germany on Friday and Saturday.
Global Stock Markets

*Note — all releases are listed in local time.

Source: Fidelity

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