Global financial markets started remained on a nervous footing and Asian currencies fluctuated wildly, as deepening concerns about a global economic slowdown spooked investors still shaken by the worst year for equities in a decade in 2018.
Apple shocked Wall Street with a warning that it would fall short on revenues in the fourth quarter, undershooting a previous forecast by as much as 10 per cent, as the company blamed economic weakness in China.
That came a day after data indicated that China’s manufacturing sector is contracting for the first time in 19 months, sending Asian equities sliding and triggering a renewed jolt of global market volatility on the first trading day of the year.
The Australian dollar dropped as much as 3.5 per cent on Thursday to hit a 10-year low, while the Japanese yen, viewed as a haven, jumped by as much as 3.7 per cent to 104.87 against the US dollar.
With investors already on edge over signs the global economy is decelerating and nerves frayed by a volatile December, the data release snapped the FTSE All-World’s four-day bounce and sent the index down 0.5 per cent on Wednesday. That was despite an oil price bounce that helped US and UK equities claw back some initial losses.
“Everyone is returning from holidays and refocusing on markets, and when the first data point they see is a bad one, that’s bad for sentiment,” said Kristina Hooper, chief global market strategist at Invesco.
The S&P 500 fluctuated between gains and losses through the day, but ended with a narrow 0.1 per cent gain thanks to US energy stocks jumping over 2 per cent. The Nasdaq Composite rallied from an initial slump to gain 0.5 per cent, while the industry-heavy Dow Jones Industrial Average only edged up 0.1 per cent.
The FTSE 100 also recovered from an initial fall on Wednesday, ending the day slightly higher as the 2.4 per cent rise in the price of crude oil supported the shares of London-listed oil majors. According to opening calls, it was expected to fall 0.5 per cent on Thursday.
Traders warned that the economic backdrop remained a concern. Even as most major economies slow, concerns are rising in particular over the impact of trade sanctions on China, with the official index of manufacturing activity showing the first contraction since July 2016, and the private Caixin manufacturing index falling to its lowest level since May 2017, according to data released on Wednesday.
“We believe that the data reflect that not only has the trade war damaged growth in the export sector, it has also hurt export-related supply chain companies and, in turn, domestic demand,” said Iris Pang, an economist at ING. “If domestic demand is not supported by fiscal stimulus quickly, then further weakening will pose a risk to job security. That could create a vicious downwards cycle.”
As well as the weak manufacturing figures in Asia and parts of Europe, investors have returned from the new year break faced with threats from the China-US trade war, the US federal government shutdown — now in place for almost two weeks — and the prospect of a disorderly Brexit.
Central banks are also tightening monetary policy, ending the era of economic stimulus dating back to the financial crisis and causing further worries over the fate of global markets this year.
The combination has meant little respite from the bruising end to last year, when global stocks posted their worst December performance since the Great Depression.
At the first cabinet meeting of the year on Wednesday, US President Donald Trump said the December drop in US equity markets had been a “glitch”, but he expected shares to rise again “once we sort out these trade deals”. Mr Trump said negotiations to defuse tensions with China, due to restart next week in Beijing, were “coming along very well”, despite few signs of progress.
Some strategists believe that with investors now so glum, equity prices much lower and global economic growth still positive — albeit not as strong as last year — markets could still be primed for a bounce this year.
“2019 has the potential to be better than 2018,” Ms Hooper argued. “Expectations are lower, and the silver lining of weaker data is that it could make the Federal Reserve take its foot of the interest rate hiking pedal.”
Indeed, traders are now betting that the US central bank stays its hand through 2019. Futures markets are indicating an 80 per cent chance of zero rate increases through the year — up from just 26 per cent at the start of December.
The Hang Seng stayed under pressure, losing a further 0.4 per cent having fallen closed down 2.8 per cent om Wednesday, its biggest single-session fall since October. On the Chinese mainland, the CSI 300 fell a further 0.5 per cent.
“Investors are still not convinced there are meaningful grounds for compromise between Washington and Beijing,” said Karen Ward, a strategist at JPMorgan Asset Management. “The market now wants to know that there will be a concrete agreement which can stop the downturn in business sentiment before firms start to materially cut back on investment and hiring.”
Highly rated government bond markets were calmer after haven demand sent their yields sharply lower on Wednesday, when German Bund yields dropped especially sharply. Having fallen 7 basis points to 0.16 per cent, the yield on the benchmark 10-year Bund was steady at 0.17 per cent on Thursday. The 10-year US Treasury yield dipped a further 4bp to 2.6185 per cent, the lowest since January 2018. .
