Having come off the back of a dreadful week, Asia markets continued the weaker tone after Chinese trade data showed that the Chinese economy continued to slow in November.
Weaker-than-expected exports, as well as imports, would appear to point that tariffs may well be starting to have an effect. The resilience in imports in the lead up to the initial start of tariffs could have been because of an acceleration in demand, as businesses tried to beat the start date. More worryingly for the global economy is the decline in exports, which would appear to suggest that global demand is waning, with exports to all of its main markets down from the pickup that we saw in September and October.
The Japanese economy also showed further signs of weakness, as Q3 GDP contracted even further, coming in at -2.5%, down from -1.2% in the previous quarter. This economic weakness, coming as it does against a backdrop of increasing concerns that there will not be a speedy conclusion to the trade tensions between the US and China, is giving investors little reason to buy back into the market at a time of the year when volume and liquidity is likely to decline further. The hawkishness from US trade negotiator Robert Lighthizer that the 90 day deadline is a hard deadline, has added to the negative sentiment at a time when tension between the US and China is rising after the arrest of the Huawei CFO two weeks ago in Canada.
While economic weakness in Asia is weighing on sentiment, political instability in Europe is also acting as a disincentive to pile into European stocks, in the aftermath of further weekend of violence in Paris. It is also a big week for the UK as prime minister Theresa May steels herself for a big defeat in the so-called 'meaningful' Brexit vote in the UK parliament tomorrow.
The prime minister is coming under increasing pressure to pull the vote in order to avoid the embarrassment of having to go back to Brussels later this week, as pressure continues to grow for alternative options. If the deal is voted down the PM has 21 days to come back with an alternative plan, a tall order given that there doesn't appear to be a majority in parliament for any form of reasonable compromise, though there have been calls for some form of Norway+ deal, which could involve single market membership, with a separate customs arrangement.
Today’s ruling by the European Court of Justice is set to make like more difficult, or easier, depending on your view point, for the UK, as they confirmed last week’s opinion of the Advocate General, that the UK could unilaterally revoke the Article 50 notification. This would enable the UK to reverse the decision to leave the EU, as long as it is done before 29 March 2019. This will inevitably increase calls for a so-called 'People’s Vote' in the hope of reversing the vote from June 2016. This would still need an act of parliament, a tall order given the current dysfunction in the UK political system. Brexit supporters now face the prospect that a vote against the PM’s unpopular deal will increase the likelihood that Brexit may well not happen at all.
European markets have taken their cues from Asia markets, opening sharply lower as investor nerves spill over into the new week.
Interserve shares have plunged on the open after weekend reports that it is in talks with its lenders to cut its debt in order to help strengthen its balance sheet. Its recent attempts to restructure its business appear to be running into trouble as it looks to reduce the amount of its borrowings. In what is likely to be another politically embarrassing development for the UK government, this setback coming on the back of Carillion collapse earlier this year is set to reopen the debate about private company’s tendering for public service contracts.
Thomas Cook’s share price has continued to decline over concerns that its rising debt levels could mean that it needs to raise new capital.
British Gas owner Centrica shares are also under pressure in early trade after weekend reports that it might struggle to maintain its dividend, against a difficult backdrop in both its UK and US markets. The company’s plans to sell off a 49% stake in its nuclear power station assets hit a pothole after the European Court ruled it was illegal to pay energy providers to keep power plants open to ensure that they are able to react to a sudden cold snap, and increase in power usage.
Crude oil prices appear to be stabilising after last week’s Opec meeting agreed to production cuts of 1.2m barrels a day from January. Whether that is enough to bring down inventory levels at a time when economic data is showing signs of slowing remains to be seen but it does appear to have helped put a floor underneath prices in the short term.
US markets look set to take their cues from today’s weak start to the week with a lower open, despite a non-farm payrolls report on Friday that could best be described as in line with expectations, though there were some signs of a slowdown in hiring, which might suggest a tightening labour market.