Daily reviews

07.10.2019

Recession fears knock stocks down, dollar on the defensive

news

Asian stocks edged up on Friday after gains on Wall Street, but on a weekly basis, the markets suffered losses amid further signs of slowing global economy and Fears of an escalating trade war.

  • Global stocks mostly lower amid dismal economic data from major economies
  • Trump impeachment probe gains steam, adds to the negative sentiment
  • Dollar finished the week as net loser due to rising bets that the Fed will cut rates further
  • US ISM Manufacturing PMI for September contracted at a faster pace than August
  • Oil prices posted its biggest weekly loss since mid-July
  • Investors shift focus to the upcoming US-China trade talks


Asian equities

Asian stocks edged up on Friday after gains on Wall Street, but on a weekly basis, the markets suffered losses amid further signs of slowing global economy and Fears of an escalating trade war. In particular, fears came from the global manufacturing sector, with US manufacturing contracts to worst level in a decade. Meanwhile, the risk that Washington may impose tariffs on EU aircraft and agricultural products added to the nervousness in the markets.

On Friday, MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.4 per cent. Japan's Nikkei stock index rose 0.22 per cent, and Australian shares rose 0.54 per cent. Japan's Nikkei was down 2.3 per cent for the week and registered its biggest weekly decline since August 2 amid worries about the trade war and a resurgent yen.


US equities

The Labor Department’s monthly employment report manages to somehow calm fears of a recession. At the same time, the figures provided enough evidence of a slowing economy, so investors maintained their expectations for another Federal Reserve interest rate cut in late October. U.S. stocks closed higher Friday after the release and climbed for a second day in a row, after a shaky start for the week. However, Dow and S&P 500 index ended the week with losses.

The Dow Jones Industrial Average rose 1.42%, to 26,573.72, the S&P 500 index added 1.42% to 2,952.01 while the Nasdaq Composite advanced 1.4%, to 7,982.47. For the week, the Dow lost 0.92% for a third week of declines, while the S&P 500 ended 0.33% lower while the Nasdaq managed to gain 0.54% after two weeks of losses.


Currencies

Dollar demand prevailed early in the week due to risk aversion amid global economic growth fears. However, some positive US-China trade headlines and mixed US employment data pushed the greenback lower by the end of the week. As such, September unemployment rate fell to 3.5%, a 50-year low, while payrolls rose by 136,000 versus +145,000 expected. Meanwhile, wages were flat after a 0.4% rise in August, and the net jobs gain was below expectations and the previous result. Besides, U.S. trade deficit expanded in August. In other economic news, Chicago business barometer slipped to 47.1 in September versus 50.4 in August. ISM Manufacturing PMI for September showed contraction at a faster pace than August, to 47.8 versus 49.1 previously. The September ISM Non-Manufacturing Index was 52.6, compared with an expected 55.3 and down sharply from August’s 56.4. It was the weakest reading since August 2016. Factory orders fell 0.1% in August, in line with economist expectations. Durable goods orders rose 0.2% in August, unrevised from last week's initial estimate. Orders for nondurable goods fell 0.3% in the month.

As for the signals from the Federal Reserve, Fed’s Williams said the outlook for U.S. economy was ‘mixed’. Chicago Fed’s Evans said he was worried about inflation outlook, open minded on more rate cuts. Mester noted that running a ‘hot’ economy risks faster automation. Meanwhile, Clarida highlighted that that the central bank will set policy meeting by meeting, with risk of recession isn’t high as long as Fed gets policy right.

Against this backdrop, EURUSD, which registered fresh two-year lows around 1.0880 earlier in the week, managed to recover on rising bets that the Fed will cut rates in October. The pair finished at 1.0980 on Friday as the 1.10 figure capped the bullish attempts. As for the USDJPY pair, the prices registered lows just below the 106.50 handle and closed under 107.00, which points to lingering downside risks as risk-off sentiment may reemerge. For the week, the dollar was down 1.04 per cent versus the yen and off 0.3 per cent against the common currency.


Commodities

A series of weak economic data coupled with uncertainty on the US-China trade front sent oil prices lower, with Brent posted its biggest weekly loss since mid-July. Futures settled higher on Friday but closed significantly lower in the weekly charts. Brent crude oil for December delivery down 5.72 percent. Oil prices settled significantly lower earlier in the week amid reports that Saudi Arabia has made progress in restoring its oil capacity. According to the Energy Information Administration, U.S. commercial crude oil inventories increased by 3.100 million barrels from the previous week.

On Friday, oil prices rebounded as the fresh U.S. jobs data somehow eased concerns that a slowing global economy could weigh on energy demand. Also, Baker Hughes on Friday reported that the number of active U.S. rigs drilling for oil fell by three to 710 last week, following declines in each of the last six weeks. As such, starting the week above $61, Brent crude slipped to early-August lows marginally above the $56 handle and recovered to $58.50 on Friday. As long as prices remain below the $60 barrier, downside risks persist.