The world’s third- and fourth-largest economies are shrinking. The European Union is battling with the UK and Italy over Brexit and a deficit-boosting budget, respectively. Traders are reeling from a plummet in oil prices that sent shockwaves through the stock market.
Needless to say, it’s going to be a busy day. Here’s a quick catch-up on what’s happening:
In Japan, GDP fell 0.3% in the third quarter, after increasing 0.8% in the three months to June. At an annualized rate, it contracted by 1.2%, with activity severely curtailed by natural disasters. Flooding in June and July killed nearly 200 people and millions had to evacuate their homes. Then, in September, Japan faced its most powerful storm in 25 years, followed by a 6.7-magnitude earthquake. In all, these disasters disrupted consumer spending and exports. Though a rebound is expected at the end of the year, there are still concerns that the US-China trade war will hamper Japanese growth; China is Japan’s largest trading partner.
Germany is feeling the effects of the trade war. GDP in Europe’s largest economy fell in the third quarter, the first contraction since the start of 2015. Growth declined by 0.2%, more than economists projected and the most since 2014, substantiating fears about a global economic slowdown. The German statistics office said the decline was due in part to a decline in exports, a key driver of the economy. In September alone, German exports declined 0.8%. Analysts at Commerzbank said the German economy was suffering from declining demand from China and lowered its forecast for 2018 GDP growth to 1.5%, from 1.8%.
Separate data showed that GDP grew just 0.3% across the EU (pdf), down from 0.5% in the second quarter.
It seems the UK and EU have come to an agreement on a Brexit deal, at last! While this is good news, there are many more hurdles before the deal is official. The pound rallied yesterday, when the deal was made public but is heading lower this morning as traders ponder how prime minister Theresa May is supposed to get this deal past her cabinet and a deeply skeptical parliament. Before even seeing the details of the agreement, many prominent Brexiteers have pledged to vote against it. Meanwhile, pro-EU members of May’s government spent last night at a rally in support of holding a second referendum on EU membership. And the DUP, the Northern Irish party supporting May’s slim majority in parliament, have expressed reservations.
The uncertainty has sent volatility on the pound to its highest level since January 2017. Analysts at Danske Bank said on a call to clients this morning that if the deal makes it through the cabinet today, then the pound could rise. But “any rally in sterling today would be a selling opportunity,” they said.
Italy’s populist, anti-establishment government is standing its ground against the EU. Rome has decided to not revise its budget that projects a deficit next year of 2.4% of GDP and and 1.5% economic growth. The budget would cut taxes, introduce a universal basic income, and lower the retirement age. Italy’s plan breaks EU rules on “excessive deficits,” which could result in fines and other penalties. That said, no country has ever had to pay a fine before for breaching these rules, which could explain Rome’s recalcitrance. Part of the problem is also that Italy’s growth forecasts are far more optimistic than consensus forecasts. If GDP rises just 1%, as the IMF forecasts, then the country’s budget deficit would be 2.66% of GDP (paywall), exacerbating Italy’s already daunting debt problem.
Anyway, markets don’t like it when countries fight with the EU’s institutions (no one has forgotten how close Greece was to being ejected from the euro). Traders are also concerned about how Italy will keep servicing its debt, which is becoming increasingly costly. Yields on Italy’s 10-year government bonds rose this morning as traders dumped the debt.
Prices for West Texas Intermediate, the US crude benchmark, are in the midst of a record losing streak. Prices plunged by 7% yesterday, the biggest one-day drop in three years. Traders seem to have taken Donald Trump’s words to heart, after he tweeted, “Hopefully, Saudi Arabia and OPEC will not be cutting oil production. Oil prices should be much lower based on supply!” Meanwhile, OPEC published forecasts suggest weak demand for oil.
While oil prices are flat this morning, the drag from energy companies pushed European and Asian stock markets into the red. US stock futures are trading slightly lower at the time of writing.
And all that is just in the past few hours. Throughout the rest of day, markets will be watching for an update on US inflation and monitoring remarks by Federal Reserve chairman Jerome Powell, who might calm traders’ nerves by suggesting the US will go easy on interest-rate hikes as economic conditions deteriorate. Or he might not.