US equities got slammed overnight, the Dow plunged a further 350 points as recent volatility shows no signs of abating. The list of concerns weighing on sentiment is stacking up at an alarming rate. What started as fears over higher US interest rates and trade wars has grown to include souring US – Saudi relations, turmoil in the Chinese stock markets and concerns over Italy’s declining relations with the EU.
Data overnight showing that the Chinese economy grew at the slowest pace since the financial crisis initially sent Chinese stocks tumbling with the CSI 300 off 1.1% at its worst. Growth of 6.5% and industrial production down to 5.8% confirmed investor fears that the Chinese economy is struggling to hold up under the weight of the on-going trade war and de-risking of the economy. Supportive words from top Chinese financial officials promising further easing measures have been enough to encourage bargain hunters to jump back in, lifting the Chinese stock market higher.
The outlook for the Chinese economy remains a concern. The impact of trade tariffs is not expected to be fully felt until Q4 and 2019. Then it will take more than a few soothing words to keep investors buoyant, serious measures to stabilise the economy will be needed.
China aside, markets across Asia took the lead from a weaker Wall Street, falling across the session. A combination of Chinese growth concerns, trade tensions and higher US rate fears proved to be a toxic combination for investor sentiment. European bourses are also pointing to a softer start. The FTSE looks set to buck the trend and open higher. The FTSE MIB is a noticeable decliner.
Euro Under Pressure as Brussels Heaps Criticism on Italian Budget
The euro was hovering around a one-month low versus the dollar as Italian spending plans were once again under the spotlight. The European Commission’s criticism of Italy’s draft budget, saying it is a serious breach of European Union rules, has increased the likelihood of a showdown between Rome and Brussels, unnerving investors. However, Brussels has limited power in this unprecedented situation, making its outcome all the more uncertain.
Pound Unimpressed with Brexit Transition Extension Talk
The pound experienced its worst session in a month, amid growing political tension in Westminster. Theresa May is under attack from both sides of the Brexit debate as she considers extending the post Brexit transition period in an attempt to unlock Brexit talks. By extending the transition deal, she would be giving the UK more time to strike a post-Brexit trade deal, therefore avoiding a need for a backup plan. With both Brexiteers and Remainers agreeing that this looks like another attempt to kick the can down the road; even the pound was unimpressed.