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Trade wars: Markets slide again as China blasts US's 'intimidation and coercion' - business live UK factories suffer shock contraction as Brexit and trade wars bite - business live
(about 2 hours later)
Kier shares tumble 30% after profit warning Just in: Donald Trump has just accused China of subsidising its industries to help them cope with the trade war.
Britain’s smaller FTSE 250 index, is also having a bad morning - down 1% at 18,781 points. The US president, at the start of his state visit to the UK, tweeted:
Troubled outsourcing group Kier is doing some of the damage - it has slumped by 40% this morning to a 20-year low after issuing a profits warning. China is subsidizing its product in order that it can continue to be sold in the USA. Many firms are leaving China for other countries, including the United States, in order to avoid paying the Tariffs. No visible increase in costs or inflation, but U.S. is taking Billions!
Kier, which build roads and runs public sector services, says revenue growth is weaker than expected, knocking £25m off profits this year. In another blow, the cost of its restructuring programme has jumped by 15%. Unfortunately, most of those “billions” are coming from American firms, not Chinese ones, as they’ve been picking up the tab.
Otherwise, energy firms and tech companies are among the top fallers on the mid-cap index, matching the moves on the FTSE 100. Late last month, the International Monetary Fund showed that the tariff revenue collected has been borne almost entirely by US importers. IMF researchers found that US and Chinese consumers are “unequivocally the losers from trade tensions”.
The sell-off is deepening in London. They explained:
The FTSE 100 is now down 80 points, or over 1%, with only a handful of stocks defying gravity. Every sector has fallen, led by energy (tracking the oil price), technology (China concerns), consumer goods-makers and miners (recession fears). Some of these tariffs have been passed on to US consumers, like those on washing machines, while others have been absorbed by importing firms through lower profit margins.
Online grocer Ocado is the top faller, after being downgraded by investment bank Jefferies. Brexit stockpiling helped the UK economy to grow by a meaty 0.5% in the first three months of 2019. Today’s weak PMI report suggests growth may be rather slower in the current quarter, points out Markit’s Chris Williamson:
Morgan Stanley has also warned investors that the US-China trade war could be worse than feared. UK factories struggle as Brexit stock build impact unwinds: IHS Markit/CIPS manufacturing #PMI fell from 53.1 in April to 49.4 in May, below the 50.0 ‘no change’ level for the first time since July 2016. Q1 boost to economy will reverse/fade in Q2 https://t.co/YVp5iDGwcM 1/3 pic.twitter.com/tVOxXFwU9j
Its chief economist, Chetan Ahya, has warned that the global economy could slump into recession if president Trump expands the trade war to all Chinese exports. We’ll have a clearer picture by Wednesday, when the Service Sector PMI is released (we also get the UK construction PMI tomorrow).
Ahya wrote: Lee Collinson of Barclays Corporate Banking says UK factories have fallen into a dip as Brexit stockpiling unwinds:
“My recent conversations with investors have reinforced the sense that markets are underestimating the impact of trade tensions. Manufacturers have been warning for some time that they are trying to navigate a number of headwinds, and the hard to predict Brexit negotiations have certainly made investment decisions more difficult, with falling car production indicative of the issues being faced.
Investors are generally of the view that the trade dispute could drag on for longer, but they appear to be overlooking its potential impact on the global macro outlook.” It’s not all about Brexit though, with weaker global demand already taking a bite out of exports.
Morgan Stanley sees a recession within a year if US-China Trade war gets worse. @EconomicTimes @business pic.twitter.com/dhEsdl5Ldl KPMG’s Stephen Cooper agrees that Brexit isn’t the only reason the UK manufacturing PMI has tumbled:
Wall Street giant Goldman Sachs has become more pessimistic about the trade war. “Any potential benefits from the auto shutdowns [in April] have been outweighed with falling orders, high inventory levels - from previous stockpiling - and worryingly, a reported shift with some EU customers moving their supply chains away from the UK amidst continued Brexit uncertainty.
It now believes there’s a 60% chance that America imposes tariffs on ALL Chinese goods (currently around half, or $300bn per year, are exempt from the trade war). That’s up from 40% previously. The global backdrop is also one of uncertainty - with trade wars, geopolitical events, automotive developments and Brexit – all of these factors are weighing on manufacturing in Europe and Asia and they are reflected in May’s readings.
In a report issued last night, Goldman economists warn: Here’s Howard Archer, economist at EY Item Club, on this morning’s worrying fall in UK factory growth:
“Rhetoric in China has intensified... additional escalation looks likely from both sides, including tariff and non-tariff measures.” On the export front, manufacturers are hampered by recently slower global growth. Global trade conflicts and tensions are also a concern for UK manufacturing exporters. On the positive side, the weakness in the pound may provide some help to UK manufacturing exporters.
European stock markets have fallen in early trading, hit by trade war anxiety. UK manufactures could be hurt by EU companies switching supply chains away from the UK. This may be countered though by UK companies switching their supply chains from the EU to the UK
Britain’s FTSE 100 has shed 66 points, or 0.9%, to 7095, its lowest point since mid-March. China’s latest criticism of America’s trade war policy (see here) is hitting sentiment in the City. If the UK does ultimately leave the EU with a “deal” at the end of October manufacturers will clearly hope that this reduces uncertainty, boosts confidence and lifts business demand for capital goods as well as consumer demand for big-ticket manufactured goods.
The French CAC and Germany’s DAX have both lost 0.75%, adding to Friday’s losses (after America announced new tariffs on Mexican goods). There is one glimmer of good news amid the gloom -- half of the factory bosses interviewed by Markit expect output to be higher in a year.
Trump 'deadly serious' about Mexico tariff threat, White House aide says Duncan Johnston, UK manufacturing industry leader at Deloitte, says:
Neil Wilson of Markets.com says a combative speech by Chinese defence minister Wei Fenghe is also hitting share prices. “This month’s disappointing PMI figure of 49.4 is undoubtedly a combination of ongoing Brexit uncertainty and underlying macro and global trade factors. However, it is hard to unpick what has had the larger impact.
Global stocks were down by around 6% in May – can we get a better June? The runes are not looking great. This backdrop of uncertainty is expected to continue for some months, but there is cause for optimism. Purchasing managers remain positive, with almost half expecting output to be higher in a year’s time and only 10% expecting it to be lower.”
European shares are lower today as trade tensions continue to mount and investors exhibit greater fear about the global economy and the risk of recession. Asian markets were generally lower after a big selloff on Wall Street on Friday that saw the S&P 500 decline 37 points, or 1.32%, to finish at 2,752.06, below its 200-day moving average. Make UK, which represents British manufacturers, says customers are taking their business elsewhere, driven away by Brexit worries.
The trade war is not cooling down; in fact, it looks like the rhetoric is heating up and further escalation seems likely. China is raising tariffs on $60bn of US goods in retaliation for tariffs, coming up with its own blacklist of foreign companies, has accused the US of resorting to ‘intimidation and coercion’, and begun an investigation into FedEx. And the Chinese defence minister says if the US wants a fight, they will ‘fight to the end’. No end in sight, and the chances of a G20 détente are slim. Seamus Nevin, their chief economist, says this helped to pull manufacturing output down last month.
Investors are also reeling from the news that America considered beginning a trade war with Australia - a key US ally. “The extent to which stockpiling was artificially boosting output earlier in the year is now clear with the PMI plunging into negative territory for the first time since the Referendum. Manufacturers are reporting export demand is weakening as customers look to buy goods from other countries which they once bought from the UK.
The New York Times reported that some of Mr Trump’s top trade advisers had urged the tariffs as a response to a surge of Australian aluminium flowing onto the US market during the past year. This is not only the case with European customers but also from countries in Asia with which UK manufacturers trade under the terms of EU free trade deals.
Australian PM Scott Morrison has tried to calm nerves, saying his administration is “working closely with the US officials and the White House” on trade issues. That’s not a denial, though, that something has been threatened..... Nevin also points out that Europe’s factories are also slowing (see 9.32am for details), hit by the global slowdown.
Scott Morrison plays down report US planning tariffs on Australian aluminium “The weakness in manufacturing output in the UK is also clearly linked to what is happening in our main trading market, the EU. Eurozone PMI remained in negative territory for the fourth consecutive month with both Germany and Italy struggling as the global economic slowdown gathers pace.
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business. “This is not a good time for our economy to be preparing to go it alone. Once again the data is showing a consistently downward trend and, in this context, continued political uncertainty at home can only make an already difficult situation worse.”
It’s a new month, but the same old issues. The markets are starting June as they ended May - with anxiety over US trade policy hitting asset prices and driving up volatility. Britain’s factories could be heading into a recession now that they’re no longer scrambling to protect themselves from a cliff-edge no-deal Brexit.
Over the weekend, Beijing stepped up its fightback against Donald Trump by accusing Washington of”intimidation and coercion”. Capital Economics fear that the stockpiling boost that supported manufacturing earlier this year has now faded.
Vice Commerce Secretary Wang Shouwen blasted America’s decision to blacklist Chinese firms such as Huawei, saying: The sharper-than-expected drop in the #manufacturing #PMI from 53.1 to 49.4 (consensus 52.0, CE 51.0) means that the index is now at its lowest level since July 2016 and suggests the sector will slip back into contraction as the boost from no deal preparations unwind. pic.twitter.com/zO0l9jCPNl
“The China-US economic and trade consultations have been severely frustrated by the US tariff increases and [the US’s] abuse of export controls by including Chinese companies on the entities list.” Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply, is also concerned that Britain’s factories contracted last month:
In a new white paper on trade, China blames the US government for the failure to reach a trade deal, claiming: With one of the fastest shrinking rates seen in six and a half years and the biggest drop since July 2016, straight after the referendum result, based on this result, there is the likelihood of more bad news to come.
Resorting to intimidation and coercion, it persisted with exorbitant demands . . . and insisted on including mandatory requirements [that infringe on] China’s sovereign affairs in the deal.” “Supply chain managers voiced their deep anxieties over Brexit’s continuing impacts as some supply chains were re-directed away from the UK resulting in a drop in total new orders for the first time since October.
The white paper also lays out how the trade war between the two economic powers has backfired. Bloomberg has more details: Clients from Europe and Asia were particularly reluctant to commit to new business across all sectors but the intermediate sector suffered the worst fall in seven years as the pipeline of work dried up. It has now become obvious that the stockpiling activities of the last few months were propping up the sector’s performance.
The paper contends that the trade actions have done serious harm to the U.S. economy by increasing production costs, causing prices hikes, damaging growth and people’s livelihoods and creating barriers to U.S. exports to China. In short, Trump’s tariffs aren’t helping, China concluded. The UK factory sector was buffeted by ongoing Brexit uncertainty again in May, says Rob Dobson, dragging the PMI to a near three-year low.
“It is foreseeable that the latest U.S. tariff hikes on China, far from resolving issues, will only make things worse for all sides,” according to the white paper. He also fears that British manufacturing could continue to shrink in the comping months.
And rather than backing down, China has just fulfilled its pledge to increase tariffs on $60bn of American good, in response to the latest US tariffs on Chinese goods. The trend in output weakened and, based on its relationship with official ONS data, is pointing to a renewed downturn of production.
Asian markets have reacted badly - Japan’s Nikkei has shed almost 1% today, with China’s Shanghai composite also dipping. European and US markets are also expected to open in the red, ahead of new healthchecks on their factory sectors today. “New order inflows declined from both domestic and overseas markets, as already high stock levels at manufacturers and their clients led to difficulties in sustaining output levels and getting agreement on new contracts.
European Opening Calls:#FTSE 7131 -0.43%#DAX 11646 -0.69%#CAC 5168 -0.76%#MIB 19625 -0.89%#IBEX 8946 -0.65% Demand was also impacted by ongoing global trade tensions, as well as by companies starting to unwind inventories built up in advance of the original Brexit date.
The oil price - a gauge of growth expectations - has taken a tumble too; Brent crude is now just $61.30 per barrel, the lowest since mid-February. Newsflash: Britain’s factory sector has suffered its worst contraction since the EU referendum almost three years ago.
Global mkts have started the week on negative footing & oil extends slide as trade wars stoke global recession anxiety. Crude oil tumbled 16% in May. Shanghai copper at 2y low. Treasuries flat w/US 10y yield at 2.13%. Mkts price in 50% chance of Fed cut by Jul. Bitcoin at $8.6k. pic.twitter.com/C9ARFJriTS Data firm Markit reports that new orders and employment both declined last month, hit by Brexit uncertainty and the knock-on impact of the US-China trade war.
Donald Trump’s threat to impose tariffs on Mexico late last week has hit investor confidence too. Firms also reported that they have slowed their recent flurry of stock-piling, following the latest Brexit extension to the end of October.
Jim Reid of Deutsche Bank told clients this morning that it has increased the risk that America intensifies its trade dispute with Europe. Markit says:
One of the additional worries would be that if the US has been so quick to escalate the trade war on these two countries [Mexico and China] the bar must be a bit lower to carry out a trade assault on Europe at some point in the future. Interesting times. New order inflows deteriorated from both domestic and overseas sources. New export business fell for the second month running and at the quickest pace in over four-and-a- half years. Manufacturers reported lower demand from Asia and Europe.
The latest PMI reports, due today, will show whether manufacturers took a big hit from the trade war last month. There was also mention of Brexit uncertainty, including clients diverting supply chains away from the UK, leading to lower demand from within the EU.
The agenda This pulled Markit’s UK manufacturing PMI down to 49.4 -- the lowest reading since July 2016, when factories were reeling from the Brexit vote.
9am BST: Eurozone factory PMI report for May That’s worse than the City forecast (of 52), and shows that the sector contracted in May.
9.30am BST: UK factory PMI report for May That suggests that Britain’s manufacturing sector has weakened, which is a worrying sign for the wider economy.
3pm BST: US factory PMI for May Reaction to follow!