Category: Stock News

On the back of freefalling Chinese equities and slowing growth, dwindling European markets, and signs that the next global economic downturn could be upon us, the US stock market got crushed yesterday. Nasdaq had its worst day in seven years after a series of late selloffs erased all gains for the year for the Dow Jones Industrial Average and the S&P 500.

Nasdaq Sees Worst Day in 7 Years

It was down and dropping with the worst of the bleeding coming from a late rout in US stock markets on Wednesday causing the S&P 500 to fall by 3.1% and the Nasdaq Composite to shed 4.4%–its biggest drop in a single day since August 2011.

Most of the panic selling happened in the last hour of the trading day as things went from bad to worse pretty quickly.

Tuesday’s Q3 earnings reports from US industrial giants 3M and Caterpillar took their toll on nervous investors with industry and energy among the hardest hit on Tuesday.

Yesterday’s bloodbath, however, was led by the communications services sector, chiefly, AT&T, ending 8% down after missing its quarterly profit forecast thanks to more and more Americans cutting the cord on their pay-TV subscriptions.

Fear and Panic Across All Industries

No industry was spared in the dive, and the tech sector also saw dramatic drops, with chipmakers, in particular, suffering from the decline.

The S&P 500 semiconductor and semiconductor equipment index dropped by 6.5%, registering its worst day since January 2009.

Stock Market Slide Continues in Asia

Thursday is shaping up to be another torrid day for Asian stock markets as China’s CSI index of mainland companies dropped by a further 2.8%, down by almost 9% in October, the worst month so far since January 2016.

The carnage was echoed in South Korea with the Kospi index down 12.6% and Japan’s Topix index down 11%. Both these markets are set to make October their worst performing month since October 2008.

Hong Kong’s Hang Seng also fell by 2.4% this Thursday, bringing the index down by 11% this month with its sixth consecutive monthly fall–the longest consistent decline since 1982.

Highly valued tech stocks also suffered a mighty battering after years of stellar gains. That included Chinese tech giant Tencent down by 3%, and AAC Technologies Holdings, a high-tech component maker slumping by 6% so far this Thursday.

Why Is This Happening?

Stock markets are funny things. And highly susceptible to external pressures. In the case of this October, there’s a combination of factors that have gotten investors spooked. Partly, the stock market, particularly the tech sector, has been on a multi-year bull run with overinflated prices and high valuations. In part, a correction of sorts in this sector is long overdue.

External geopolitical pressures are also weighing heavily on investor confidence and global stock markets, with many companies bracing for lower profit margins in the wake of rising global tariffs and interest rates.

The slowing growth in the Chinese economy, ongoing US-China trade war, uncertainty in Europe over Italian bonds and Brexit, and the tensions with Saudi Arabia after the killing of journalist Jamal Khashoggi are all battering a fragile stock market and causing investors to pull the plug.

Is the next global recession here? I hate to be the bearer of bad news, but let’s just say, the signs aren’t looking good.

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The last couple of years have been great (if you’re lucky enough to live in a country that’s managed to pull itself out of the last financial crisis). Stock markets have been on a lengthy bull run, the economy is booming, US unemployment is at a 50-year low, and, bam! It seems the party’s over folks. Stock markets suffered around the world on Tuesday and signs point to a global economic slowdown.

US Investors Unnerved

The US-China trade war isn’t just hurting the Asian economy. US manufacturing stands to lose as well. American investors were left rattled on Tuesday as large industrial companies reported that prices of their products would have to rise across the board–from earthmoving equipment to Post-its.

Concerns over rising interest rates, increased tariffs, and global inflation are all making investors a little twitchy. On Tuesday, large industrial companies Caterpiller, United Technologies (UTC), and 3M revealed their Q3 earnings reports.

All companies said that they will have to raise prices to cover the costs of labor shortage, decreased demand, and increased tariffs around the world. This is a price that will naturally be passed on to the end consumer.

Global Economic Slowdown May Be Imminent

While the IMF (International Monetary Fund) reports that growth in the world economy will continue in 2019, it conceded that in some larger countries like the US and China, it may have already reached its peak.

Caterpillar shares dove by as much as 7.7% on Tuesday and shares in 3M were down by 4.4%, as the prospect of a global economic slowdown increased investor anxiety.

The End Consumer Pays the Price

Caterpiller said they would be increasing their prices for their earth moving equipment by some 1-4% effective next year to reflect an increase in material prices and freight. While increased prices are expected to offset the rising costs, investors are still unhinged by the $400-million drop in Q3 earnings.

Office supplies and consumer products group 3M cut its 2018 earning projections by 4%, citing falling sales volumes in all regions except Asia-Pacific. The company is expecting an impact of as much as $100 million from tariffs next year which will translate to increased product prices.

The bad news wasn’t restricted to industrial companies either, with major consumer goods producers Kimberly-Clark also seeing a dented profit margin. The company expects increased prices on raw materials to push up end product costs.

Stock Markets Set to See Worst Month in Years

Yesterday was also a dark day for Chinese equities, on track to make October the worst month in the last two years. On Tuesday, the CSI 300 index fell by 6% in the face of mounting global pressures, and despite Chinese officials’ attempts to reinstate investor confidence in the economy.

The S&P 500 dove by 2.3% before bouncing back to close at 0.6%, and, amidst rising concerns over global growth, tariffs, the FTSE All-World index slid 1.4%. It’s currently facing its worst performance in a month since 2012 when the eurozone crisis was in full swing. Energy and industry have been hardest hit with stocks plummeting almost 10%.

Investors, it seems, are getting ready for a global economic slowdown. Brace yourself, the bears may be getting ready to come out of hibernation.

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There’s never a dull day in the stock markets and the latest movements in Chinese equities are enough to cause palpitations in even the most conservative of investors. After the best one-day gain in three years yesterday, Chinese equities swung the opposite way on Tuesday pulling down the European and US futures trade with them.

Analysts are now concerned over the Chinese authorities ability to boost its economy. Despite speeches of encouragement, contingency plans, and even tax deduction announcements, the markets have failed to stay in the green.

After jubilant shareholders finished the day Monday smiling from ear to ear, by midday on Tuesday the CSI 300 index of major Shanghai and Shenzhen companies was already down 1.7%. The same knock-on effect was felt in Hong Kong with the Hang Seng China Enterprises Index dropping by 1.9%.

These downward swings in Asia look set to drag the European futures trade down with them, with London’s FTSE 100 expected to lose 0.8% and Frankfurt’s Xetra Dax 30 down by 1.3%. All indications point to the same trend repeating in Wall Street, with the S&P 500 expect to open down 1% and the Nasdaq Composite falling by 1.2%.

Both European and US stock markets had a slow start to the week with the S&P 500 slipping by 0.4% yesterday and the pan-European Stoxx 600 also dropping by the same amount.

Global Geopolitical Pressures Affecting Chinese Equities

Despite considerable measures taken by Chinese authorities to bolster investor confidence, the markets are back in a tailspin. Yet, there is only so much that China’s central bank and governing party can do. There are plenty of other geopolitical factors in play that they simply cannot control.

These include president Trump threatening to withdraw from the US-Russia Cold War Nuclear Treaty, the tensions between Saudi Arabia and the west over the killing of journalist Jamal Khashoggi, European pressures with Italian bonds and Brexit, and, of course, the ongoing trade war.

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The US-China trade war shows no signs of slowing down as Trump’s top economic advisor Larry Kudlow accuses China of refusing to engage in trade talks. He went on to say that Beijing was doing “nothing” to defuse the tensions between the two countries.

This comes just ahead of a likely meeting between the Chinese President Xi Jinping and US President Donald Trump in November at the G20 in Argentina. It also dampens hopes of a possible trade war truce between the two superpowers.

The US-China Trade War

The White House’s top economic advisor and director of the National Economic Council Kudlow told the Financial Times that China had shown no signs that it was willing to meet US demands, halting hopes of a breakthrough in the ongoing tariffs feud.

Earlier this year, the US imposed heavy tariffs on some $250 billion of Chinese imports (almost half of all imports), and the Chinese naturally retaliated, slapping tariffs on $110 billion of US goods. This has led to an escalating conflict between the two countries and a worsening global economic outlook.

Among the demands from the White House are changes to the Chinese economic policy, including a clampdown on industrial subsidies and a reduction in its bilateral trade deficit. Yet Trump’s demands have so far been met with nothing but resistance from Chinese officials, who believe that the demands are unrealistic and go against China’s interests.

Mr. Kudlow told the Financial Times:

“We gave them a detailed list of asks, regarding technology for example, [which] basically hasn’t changed for five or six months. The problem with the story is that they don’t respond. Nothing. Nada… I’ve never seen anything like it.”

As the US-China Trade war rages on, Chinese officials have signaled their complaints over unpredictability and a lack of flexibility from the US, as well as no clear single voice from the White House. The Trump administration, it says, is sending out mixed messages.

The Outlook

If no progress is made over the next few weeks, the trade US-China war could reach drastic heights. In fact, the US is expected to increase the tariff on $200 billion of Chinese imports from 10% to 25% early next year, adding more fuel to the fire. Trump has even threatened to impose duties on all imports from China, which would certainly lead to a backlash from the Asian giant.

Despite a bullish start to the stock market this week, the trade war has been blamed for a slower-than-expected Q3 growth in China and weakening investor confidence in the stock markets. Unless an agreement is reached, both countries stand to lose from this ongoing feud.

Featured image by Gage Skidmore, Wikimedia.

After a troublesome Q3 growth report on Friday and analysts signaling to the trade war between the US and rising interest rates, Chinese stocks rallied this Monday. In fact, not only rallied but are actually on track to make it one of their biggest gaining days since 2015.

This remarkable rebound on Monday came shortly after Beijing made significant efforts to buoy markets by reassuring investor confidence following the steep selloffs of recent weeks. By noon, the CSI 300 index of companies on both the Shanghai and Shenzhen stock exchanges was up by 4.4%. This makes for its largest gaining day in three years.

The trend was echoed in Hong Kong, with the Hang Seng China Enterprises Index of Chinese companies also jumping by 3.3%. This would make it its best day since October 2017. Even the technology company Tencent that’s seen its profits affected by tight Chinese gaming regulations also saw a jump of 4%.

China Stocks Rally but No End to Volatility

The crippling selloffs, particularly in tech, over the past couple of weeks, look to be over, at least for today. After a dismal period that saw 23% fall from the MSCI Asia ex-Japan index, the markets are rallying back. Global Market Strategist at JPMorgan Asset Management Kerry Craig said:

“After what has been a tense and terse month for Asia equities as a whole, they’re taking a breather, but that’s not to say volatility is going away… If China sneezes, the rest of the region catches a cold. The A-shares market has suffered a significant sell-off this year, so the rebound is expected after it’s been so volatile.”

Intervention from Authorities

Monday’s bounce-back happened after an intervention from China’s central bank, the securities watchdog, and China’s banking and insurance regulator, who told state media last Friday that the authorities would take the necessary measures to help markets, and that the slump in equities was no reflection on China’s domestic economic health.

Among these measures, the central bank pledged to ensure liquidity in the banking system and the Chinese authorities revealed temporary changes to individual income tax law including special deductions.

This attempt at bolstering confidence came on the back of a weaker-than-expected third quarter growth report of 6.5%.

China’s equity market takes the lead as the worst performing major global market this year, falling 25% from its peak earlier this year, and taking a toll on its national currency. Technology stocks have fared worse recently in the region, with Tencent shares dropping by almost 40% since their height in January.

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The price of gold, under higher demand, has surged over the last few days. The gold market is seeing gains over 7% in the last week, and now the third week of gains overall. So, who’s buying the precious metal and why?

Gold bullion hit $1,233.26, the highest price per ounce for two and a half months on Monday, October 20, 2018, and finished this week at $1226.49.

Gold is still an incredibly popular investment despite investor interest growing in recent years in technology stocks and cryptocurrencies. It’s a relatively stable investment and a go-to in times of uncertainty and fear of recession.

Macquarie commodity strategist Matthew Turner said on Friday to CNBC:

“Sensitivity to equity markets is helping gold at the moment.”

U.S Federal Reserve interest rate hikes are adding to fears of recession and global uncertainty. Turner added:

“We are entering a new paradigm, where any further rate hike could be a sign that the economy is overheating a bit, which should be more positive for gold and problematic for equities.”

Global stock markets have seen some big hits in recent weeks. The US markets dipped under a sell-off of technology shares and China’s massive markets are continuing to struggle under economic woes. Both the US and China are likely to suffer over this year’s trade war. Some of the money moving out of stocks and shares is almost certainly going to gold right now.

Kitco Metals senior analyst Jim Wyckoff told Reuters that the volatility in the stock markets recently has been favoring gold:

“The technical posture of gold in near term basis has improved remarkably in the past two weeks.”

A slightly weaker dollar is also aiding the price of gold. The largest gold-backed exchange traded fund (ETF), from SPDR Gold Trust, has also seen a gain of 2.5% in the past two weeks.

Russia and China are Selling US Treasuries and Buying Gold

It’s not just individual and corporate investors that are buying gold right now. Russia was in 2011 the largest holder of US debt securities in the form of US Treasury bonds with a $180 billion investment. Russia has been selling these bonds and as of August owned just $14 billion, dropping to the 54^th largest holder of US Treasuries.

A Russian broker at Otkritie bank, Timur Nigmatullin said:

“A further sale of US Treasury bonds by Russia will most likely be compensated by buying gold and opening short-term deposits at banks.”

Indeed, the percentage of gold in Russia’s foreign reserves has grown to 18%.

China, Japan, India, and Turkey have also been selling their US bonds, due in part to interest rate hikes. China and Japan are currently the largest investors in US debt.

China’s official gold reserves have grown from 1,054 tonnes in 2015 to 1,843 tonnes by the second quarter of 2018.

Matthew Mark, director of US Asset Owners at The World Gold Council confirmed:

“China is now one of the top 10 largest central banks holding gold. It has shown to be a very resilient purchaser of gold.”

The demand for gold amongst Chinese consumers has also risen 5% from last year, notable as the Chinese stock market hits lows. Mark said:

“China is one of the most exciting markets for gold because of the strengthening of its gold market infrastructure.”

Hungary Increases Gold Reserves by 1,000%

Citing economic “safety concerns,” Hungary has suddenly increased its gold reserves by 1,000%, buying gold bullion for the first time since 1986. Hungary is also following the trend of other European central banks including Poland, Austria, Netherlands, and Germany by repatriating gold reserves back to its own country, instead of placing it with the Bank of England or the U.S Federal Reserve.

Many central banks began buying more gold in 2010, last year activity in the sector grew by 36%. Though many countries keep high balances of US Bonds and the dollar to facilitate trade, conducted mostly in USD, the trend for buying gold looks set to continue.

Commerzbank analysts predicted on Friday:

“Today’s attempt by gold to lastingly exceed the 100-day moving average looks promising. If it succeeds, technical follow-up buying should push the gold price further up.”

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Starbucks shares are approaching a 52-week high after activist investor Bill Ackman announced a $900 million investment for accumulating 15.2 million of the company’s shares.

Starbucks has a market value of $29.2 billion and is the third-largest restaurant chain in the world. The company has 28,218 locations in over 75 markets, and more than 238,000 employees worldwide.

Ackman Says Starbucks Is a Good Bet

Ackman believes Starbucks shares could double in value in the next three years. According to the investor, the company has many business opportunities ahead, both in the US and in the Chinese market.

Moreover, Ackman didn’t forget to mention Starbucks’ plans for some serious share buybacks of $14 billion in the next few years. Doing the simple math, earnings per share have a growth potential of between $3.70 and $4.35 by 2021, from $2.40 in 2018.

Such a performance would push the Starbucks stock to a value of $93 to $117, by 2021. The company has already started with a $5 billion accelerated share repurchase agreement.

Besides, coffee is still a strong business worldwide. Despite its domestic performances, Starbucks has seen significant revenue growth, and has a financial position widely-recognized as reliable; its earnings per share have a notable record.

Starbucks has 3,300 stores in China and continues to open about 50 new ones each month. The company’s market share in China reached 80% last year, in a coffee shop market estimated at $3.4 billion.

Things aren’t all smooth for the company, though. As the Chinese market is expected to grow, more competitors are looking to overtake Starbucks, the most important being the Chinese chain Luckin Coffee and Coca-Cola’s Costa Coffee.

Starbucks Is Making Significant Changes in Europe

With so many events ahead, Starbucks is planning a revolution across its business operations. CEO Kevin Johnson announced changes starting next week, as the company enters a new era of challenges due to the inactive domestic market, a mammoth expansion into the Chinese market, and harsher competition. CEO Kevin Johnson said:

“Starting next week and into mid-November, there will be leadership shifts and non-retail partner impacts as we evolve the direction of teams across the organization in size, scope, and goals.”

The first strategic move will happen in Europe as Starbucks sells 83 stores to Alsea, its South American partner. The Mexico City-based company that already owns 900 stores across Central and South America will add coffee shops in Belgium, Luxembourg, France, and the Netherlands to its portfolio. However, the roasting plant in the Netherlands will continue to be owned by Starbucks.

The company is planning to close outlets in Amsterdam and focus on its presence in London instead. The management encourages its 186 employees who will suffer from this move to apply for jobs available in London. If Brexit doesn’t stop them in their tracks.

Is Starbucks a Buy?

Starbucks has enough room for growth, despite competitors, the restructuring in Europe, and a possible slow down in the Chinese market. So, even if Ackman’s predictions don’t come true, the company is probably still a good bet for long-term investors who don’t get scared off by temporary downward trends.

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Investors are selling euros and Italian bonds and Italy’s bond yields have hit highs. There are serious concerns from the European Union (EU) over Italy’s draft budget.

Italian Bonds

10-year Italian bond yields rose to 3.74% early on Friday, October 19, 2018, marking the decline in demand for Italian bonds.

The spread between yields of German and Italian bonds has widened to its highest level in almost five years at 3.4 percentage points. The widening spread illustrates the higher demand for German bonds, as Germany’s government debt is viewed as being a safer investment vehicle due to its stronger economy.

Italy’s economy and debt situation are much more volatile. Debt in the third-largest EU economy is running at around 130% of its GDP, so Italian bonds are a riskier prospect.

Budget Concerns For Italy

The yield spread between Italian and German bonds has been heightened as the EU raises concerns over Italy’s budget plans. The EU’s financial authorities rejected Italian budget proposals earlier this week citing an “unprecedented” break of EU rules pertaining to government spending and deficit levels.

Italy’s budget plans include an increase in spending and its budget deficit, which would allow Italy’s government debt to remain high. The EU has written to Italy warning:

“Those three factors would seem to point to a particularly serious non-compliance with the budgetary policy obligations laid down in the Stability and Growth Pact.”

The potential of further tensions between the EU and Italy has pushed investors to sell their Italian bonds and the price to fall, increasing the bond yields, and widening the difference between Germany’s bond yields.

Matteo Salvini, the leader of the Northern League, one of the two coalition partners in the new Italian government of 2018 said of the budget proposals:

“If Brussels says I cannot do it, I do not care, I will do it anyway.”

Portuguese and Spanish bonds have also seen a sell-off in recent days which could point to a backlash over Italian budget concerns. Italian stocks are also down.

Euro at a Two Month Low

Italy’s bond yield increase and fall in bond demand, alongside the origin of this activity–the EU’s concerns over Italy’s budget and economic plans– have affected confidence in the euro. The euro is now at a two month low.

The euro is also impacted by Brexit as discussions continue. A Bank of America strategist, Kamal Sharma warned in August 2018 that if the ongoing Brexit talks didn’t find a resolution, the impact would be seen on both euro and sterling.

Sharma said that sterling rates against the dollar could fall to lows experienced in the mid-1980’s. Stephen Jen, a currency expert at Eurozone SLJ predicted of possible EU action over Brexit stalling:

“Brussels needs to think very carefully about trying to punish UK. It is effectively using the threat of trade sanctions as a weapon. But the extreme disruption for the EU itself if this happens would be greater than some might think.”

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