World stocks fell for a third straight day on Tuesday after a stinging warning from German chemicals giant BASF about the effects of the global trade war and as hopes dwindled of a hefty U.S. interest rate cut this month.
With global macroeconomic clouds looming and markets waiting for policy signals from U.S. Federal Reserve chief Jerome Powell on Wednesday, the focus of headlines and sentiment turned to three individual heavyweight stocks.
For Europe, it was an almost 7% early slump in German chemicals giant BASF after it had blamed a global slowdown and trade war between the United States and China for what one trader described as a “shocking” 30% profit warning.
Deutsche Bank tumbled another 4% too – having already dropped 5.4% the previous day after it axed 18,000 staff – while Apple’s overnight drop of more than 2% on Wall Street after a broker downgrade dragged both global tech sectors lower. [.EU]
“Both from a bottom-up and top-down perspective, equity market valuations appear far too ambitious,” analysts at Morgan Stanley wrote in a note.
It was particularly stark, they said, as the U.S. business cycle was in a downturn and both forward-looking indicators such as global PMIs and global trade are now in contraction territory.
“Indeed, companies have begun cutting their 2019 profit forecasts, citing the trade conflict as a reason,” MS added.
In the currency markets, Britain’s pound was threatening to slip to a more than 2-year low against the dollar and a 6-month trough versus the euro amid a worsening UK economic outlook and rising fears about a no-deal Brexit.
With the key $1.25 level against the dollar giving way in early Asian trade, traders quickly pushed the British currency down half a percent and it barely budged, even as opposition Labour Party leader Jeremy Corbyn inched closer to backing a second Brexit referendum.
The broader theme though remained the potential reaction to the weaker global outlook from the world’s top central banks, especially on what Fed chairman Powell will say during a testimony and grilling from Congress on Wednesday.
Money market futures <0#FF:> are still fully pricing in a 25 basis point (bps) cut at the Fed’s July 30-31 meeting, but have almost priced out a larger 50 bps move that had been seen as a real possibility just a couple of weeks ago.
Benchmark government bond yields were clawing away from their recent lows and the dollar changed hands at 108.81 yen to build on the more than month high it had set in the previous session.
The dollar index versus a basket of six major currencies was also higher at 97.550, while the euro drooped back under $1.12 for the first since mid June.