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It was shaping up as a relatively quiet session, with world equity
markets slipping modestly on Thursday - despite blowout beats by
Facebook and Microsoft which sent the latter's stock 5% higher, sending
its market cap above $1 trillion and making it the most valuable company
in the world - amid worries on global growth and as investors digested
European earnings, while the Swedish crown slumped to its lowest in 17
years and the euro suffered after German data.
But it was Dow heavyweight 3M's disastrous earnings report and guidance
cut that sent Dow futures sharply lower as the industrial conglomerate
became the first stock to validate investor fears about growth
challenges for the rest of the year.
In a nutshell, this is what 3M reported as it lamented a
"disappointing start" to 2019: Q1 adjusted EPS $2.23, missing the
estimate of $2.48, and revenue of $7.86BN, Exp. $8.02BN. But most concerning of all was its guidance, which was slashed to an adjusted EPS of $9.25 to $9.75, down
from its prior guidance of $10.45-$10.90, and far below the consensus
estimate of $10.53, suggesting sharp weakness for the rest of the year.
And the cherry on top: 3M announced it would fire about 2,000 jobs as
the broad slowdown hits its operations.
Elsewhere, Europe's STOXX 600 lost 0.3% in early trading, with
concern over prospects for global growth underscored by weak economic
data from South Korea which earlier in the session reported its weakest GDP print since the financial crisis.
Energy stocks and a 10% drop in Finnish telecoms equipment maker
Nokia dragged down European shares, with a varied bag of earnings for
the region’s banks.
Asian markets had fallen earlier in the day, losing 0.5% as South
Korea’s economy unexpectedly contracted in the first quarter, a vivid
reminder that the global economy continues to slowdown sharply. Chinese
stocks also fell sharply late in the day, losing more than 2% following
attempts by the central bank to temper expectations for further easing
of monetary policy and another substantial liquidity withdrawal by the
PBOC. Chinese officials also warned of protracted pressure on
economic growth, casting a shadow over hopes for a sustained recovery in
the world’s second biggest economy.
Those worries on growth also played out closer to home for European
investors, with fears lingering over the state of the German economy
after a survey on Wednesday showed German business morale falling.
As a result of this weakness in Asia and Europe, the MSCI world equity index also fell 0.3%.
Amid today's renewed risk weakness, central banks continued to pivot
dovishly, with the Bank of Japan on Thursday pledging to keep interest
rates very low at least until early 2020, even as it retained main
policy targets. However in stark reversal to the market's prior response
to central bank dovishness, Japan’s Nikkei barely responded, closing
just 0.5% higher, while the Japanese yen also reacted little. The yen
was last up about a third of a percent, at 111.85 yen per dollar.
Several hours later, the Swedish Krona plunged to its lowest since
August 2002, after the central bank said weak inflationary pressures
meant a forecast rate hike would come slighter later than planned, while
the central bank announced it would resume QE until the end of 2020.
The SEK sank 1.2 percent against the euro to 10.65 - on course for its
biggest daily drop in more than six months.
Turkey’s lira also crashed against the dollar, tumbling after the
central bank announced it was removing its tightening pledge, and
confirming that Turkey would no longer defend the lira after the
nation's reserves dropped to dangerously low levels.
“You certainly have a common response (from central banks) to a
global growth slowdown in terms of monetary policy,” said Peter
Schaffrik, head of European rates strategy at RBC Capital Markets. "We
haven’t generally seen outright reduction, but it is easing relative to
what was previously communicated to, and implied in, the markets.”
The currency carnage was not over, however, and the euro suffered its
worst day in over six weeks, falling 0.6 percent to a 22-month
following the further signs of flagging growth in Germany. It was last
at $1.1141. Also on the agenda for the single currency were Spanish
elections on Sunday and economic concerns out of Italy.
China’s yuan also declined to a two-month-low against the dollar later Thursday,
while the Bloomberg replica of the CFETS RMB Index, which tracks the
yuan versus a basket of 24 trading partners’ currencies, was at the
highest in ten months. While the People’s Bank of China actually
weakened the yuan’s reference rate, that wasn’t enough to keep the yuan
index from rising so much. "Periods of broad dollar strength, as we have
seen overnight, will result in a higher CFETS Index as the yuan fixing
is normally not as weak as the moves in the basket currencies," said
Khoon Goh, head of Asia research at Australia and New Zealand Banking
Group. Overnight, Chinese state media reported that the PBoC will set
up policy framework to implement relatively low RRR for small and medium
banks, in which the extra funds will be used to support private and
small companies. However, there were later comments from the PBoC that
China's prudent monetary policy is overall appropriate and neither tight
nor loose and that the use of repos and MLFs does not signal loosening
bias.
With currencies around the globe tumbling, it's not surprising that
the dollar extended its gains, rising sharply and touching on fresh 2019
highs.
“The Fed isn’t keen to hike rates, but they are the strongest of the
bunch so money will gravitate toward the U.S. dollar,” said David
Madden, an analyst at CMC Markets in London.
Meanwhile, despite the dollar strength, oil continued to rise, Brent crude rose above $75 per barrel for the first time in 2019 in the wake of tightening sanctions on Iran, while gains in U.S. prices were crimped by a surge in U.S. supply.
Durable goods orders, initial jobless claims are due, while the afternoon sees scheduled earnings from Amazon and Intel.
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