20 ★ Friday6 September 2019

Mohamed El-Erian

Markets Insight

Slack lipped back to its flotation prices
after maiden results from the workplace
messaging software maker disappointed.
Second-quarter losses were narrower
than expected but billings growth failed
to accelerate and outage compensation
credits dented revenue. Cautious
guidance also put a cloud over the shares.
“Slack is still figuring out its life as a
public company, so such stumbles might
reoccur,” said MKM Partners. “A premium
valuation comes with high expectations
and a thin margin of error.”
Mallinckrodt ropped on reports thatd
the drugmaker might choose to seek
bankruptcy protection if legal liabilities
tied to the opioid crisis were to prove
unmanageable.The grouphad hired
restructuring firms o weigh options,t
Bloomberg reported.
Church & Dwight etreated afterr
Spruce Point Capital, a prolific short-seller
fund, released a note accusing the Arm &
Hammer toothpaste maker of “extreme
financial engineering, aggressive
accounting nd managerial self-a
enrichment practices”.
Copart, the salvage car auctioneer, hit a
record high on forecast-beating earnings.
Fourth-quarter net income soared 39 per
cent asit expanded internationally and
added services.Bryce Elder

Wall Street Eurozone London

Equinor as among the biggest Stoxxw

Europe 600 gainers after the Norwegian

state-controlled energy group launched a

$5bn share buyback.

The cash return had the potential to

reduce its share count by nearly 9 per

cent by the end of 2022.

Equinor also brought forward the first

oil from its Johan Sverdrup field in the

North Sea by a month to October.

“Equinor shares have closely tracked

European gas prices lower in recent

months and we think investors need to

be confident in a temporary inflection

before jumping back in,” said RBC. “The

start-up of Johan Sverdrup due later this

year could provide a much-needed

catalyst.”

Nordea ained after promotingg Frank

Vang-Jensen, the lender’s head of

personal banking, to chief executive with

immediate effect.

Casper von Koskull, his predecessor,

had been facing pressure from

shareholders including activist investor

Cevian Capital o cut costs.t

RetailerCasino ose on stakebuildingr

by Czech investorsDaniel Kretinsky nda

Patrik Tkac.

Dassault nda Safran th climbed onbo

better than expected interim results from

the aerospace engineers.Bryce Elder

BHP etreated after Exane BNP Paribasr

turned cautious on the stock.

The brokerforecast negative earnings

from BHP until 2022 due to the miner’s

“overexposure to the steel cycle”.

Steel priceswould probably trend

lower on a tightening of property

developers’ funding in China, it said.

Other dollar and euro earners retreated

in tandem with a rally for the pound.

Diageo nda AstraZeneca ed the blue-l

chip fallers.

ButNMC Health, the United Arab

Emirates hospital operator, gained on

Citigroup “buy” advice.

Citi said the case against NMChad

largely been neutralised in recent weeks,

yet about a quarter of the stock remained

on loan to short sellers.

Wood Group ed oil services stocksl

higher after Jefferies upgraded to “hold”.

A recently agreed nuclear division sale

would stabilise Wood’s balance sheet and,

while a lack of revenue growth left the

dividend exposed, risks were already

reflected in the stock’s 10-year low, it said.

CYBG ropped more than a fifth afterd

the Clydesdale Bank owner warned that a

late rush of payment protection insurance

compensation claims would cost an extra

£300m-£450m, putting 2019 and 2020

dividends at risk.Bryce Elder

3 Technology and carmakers rally on
hopes of cooling trade tension
3 US Treasuries offloaded as upbeat US
data revive risk appetite
3 Brent crude firms above $60 a barrel

Global stocks rallied yesterday as trade
war optimism and upbeat US economic
data took the shine off haven assets such
as gold and government bonds.
The FTSE All-World index rose more
than 1.2 per cent after the announcement
that Chinese officials would hold high-
level talks with US trade negotiators in
Washington in early October.
The news helped the technology-heavy
Nasdaq Composite index and Dow Jones
Industrial Average both rise 1.6 per cent
by midday in New York while the S&P
500 index advanced 1.4 per cent.
“The market sentiment has brightened
considerably as the seduction of chasing
positive trade war headlines are proving
far too irresistible for investors who
continue to wear trade war emotions on
their sleeve,” said Stephen Innes, Asia
Pacific market strategist at AxiTrader.
The market mood improved further
following the release of positive figures
for two sets of US data: private payrolls
and service sector numbers.
US private sector employers ramped up
hiring in August, adding the most jobs in
four months, according to payroll
processor ADP, while the Institute for
Supply Management’s non-

manufacturing index jumped to 56.4 in

July from 53.7 in July, well ahead of

market expectations.

The renewed bout of risk appetite

prompted a sell-off in haven assets.

Gold, which had been hovering near

six-year highs, fell more than 2 per cent

to $1,517 an ounce while the yield on the

benchmark 10-year US Treasury rose 12

basis points to 1.57 per cent.

Sectors set to benefit from a

de-escalation in global trade tension

supported European bourses.

The region-wide Stoxx Europe 600

firmed 0.7 per cent, helped by a 3 per cent

rally in the continent’s trade-sensitive

auto and tech sectors, which rose 2.8 per

cent and 2.3 per cent, respectively.

Taking its cue from the bullish mood,

oil continued its rally into a second

session. Brent crude, the international

benchmark, gained 1.8 per cent to $61.

a barrel while WTI, the US marker, rose 1.

per cent to $57.04 a barrel.

“The main driver [for oil] is outside of

the oil market,” said Giovanni Staunovo,

commodity analyst at UBS. “Oil prices are

following market sentiment.”Ray Douglas

What you need to know

Treasuries sell o on trade talk and service sector optimism

Source: Bloomberg

-year government bond yield ()











Tuesday Wednesday Thursday

The day in the markets

Markets update

US Eurozone Japan UK China Brazil
Stocks S&P 500 Eurofirst 300 Nikkei 225 FTSE100 Shanghai Comp Bovespa
Level 2976.75 1518.32 21085.94 7271.17 2985.86 102745.
% change on day 1.33 0.66 2.12 -0.55 0.96 1.
Currency $ index (DXY) $ per € Yen per $ $ per £ Rmb per $ Real per $
Level 98.253 1.104 107.050 1.233 7.146 4.
% change on day -0.201 0.091 0.805 1.148 -0.110 -0.
Govt. bonds 10-year Treasury 10-year Bund 10-year JGB 10-year Gilt 10-year bond 10-year bond
Yield 1.576 -0.596 -0.276 0.526 3.052 7.
Basis point change on day 10.820 7.800 1.280 10.200 -1.200 7.
World index, CommodsFTSE All-World Oil - Brent Oil - WTI Gold Silver Metals (LMEX)
Level 342.40 61.81 57.26 1546.10 19.31 2803.
% change on day 1.13 2.06 2.10 0.54 4.49 2.
Yesterday's close apart from: Currencies = 16:00 GMT; S&P, Bovespa, All World, Oil = 17:00 GMT; Gold, Silver = London pm fix. Bond data supplied by Tullett Prebon.

Main equity markets

S&P 500 index Eurofirst 300 index FTSE 100 index

| |||||| |||||||| |||||

Jul 2019 Sep

2800

2880

2960

3040

| |||||||||||||||||||

Jul 2019 Sep

1400

1440

1480

1520

1560

| |||| |||||||| |||||||

Jul 2019 Sep

7040

7360

7680

8000

Biggest movers
% US Eurozone UK

Ups

Ipg Photonics 7.

Nordstrom 6.

Mosaic (the) 6.

Rockwell Automation 6.

Borgwarner 6.

B. Sabadell 7.

Thyssenkrupp 6.

Stmicroelectronics 6.

Infineon Tech 5.

Cap Gemini 5.

Melrose Industries 8.
Nmc Health 6.
St. James's Place 5.
Itv 4.
Legal & General 3.
%

Downs

Church & Dwight Co -5.

Newmont Gold -4.

Motorola Solutions -3.

Wec Energy -2.

American Water Works -2.

Prices taken at 17:00 GMT

Rwe -2.

Novo Nordisk -1.

Reed Elsevier -1.

Beiersdorf -1.

L'oreal -1.

Based on the constituents of the FTSE Eurofirst 300 Eurozone

Fresnillo -5.

Diageo -3.

Bhp -3.

Relx -2.

Astrazeneca -2.

All data provided by Morningstar unless otherwise noted.

T

he more it changes, the

more it remains the same.

Markets and central banks

have been stuck in an

unhealthy codependence

since the global financial crisis.

Spoiled by too many years of timely

and significant liquidity support from

central banks, investors have long tran-

sitioned away from their traditional role

of pressing for favourable policy

changes — their longstanding role of

“vigilantes” — to happilybacking poli-

cies that have narrow chances of deliv-

ering durable economic improvements.

While the market is evolving away

from a sole reliance on monetary policy,

the relationship that is replacing it calls

for greater longer-term caution than

many investors seem happy to embrace.

It isevident that investors are, at last,

becoming less confident about the abil-

ity of central banks to stimulate growth,

repress financial volatility and boost

asset prices to ever higher levels —

especially in risky asset classes such as

stocks and high-yield bonds.

But, looking at market developments

over the past month, overly optimistic

policy expectations continue to have a

material impact on asset price move-

ments, raising interesting questions for

both market and economic prospects.

While abandoning unquestioned faith

in the ability of both the US Federal

Reserve and European Central Bank to

support asset prices, investors have

found a new way to profit.

That is to anticipate good news on

trade, in the form of an early and dura-

ble China-US truce that rolls back the

tariffs imposed by both countries and

lifts uncertainties in a decisive manner.

Yet the chance of this holding is slim.

If it does, it would not be sufficient to

compensate for a host of other cyclical

and structural impediments inhibiting

high and inclusive growth.

With that, the risk is rising that eco-

nomic and corporate fundamentals will

fail to improve to the extent needed to

validate already elevated asset prices

and avoid global financial instability.

While consensus expectations con-

tinue to look for a significant loosening

of monetary policy by the Fed, the ECB,

the People’s Bank of China and many

other central banks, fewer market par-

ticipants and economists expect this to

materially alter the darkening pros-

pects for the global economy.

European growth continues to

weaken, with this week’s manufactur-

ing data out of Germany suggesting a

deepening economic contraction.

China is struggling to come up with

stimulus measures that are both effec-

tive in the short run and consistent with

needed reforms over the longer term.

Emerging market currencies con-

tinue to weaken, opening the door to

destabilising debt dynamics. Even the

US, the consistent economic bright spot

among advanced countries, is showing

pockets of weakness.

Yet stocks in the advanced world have

mounted an impressive recovery from

the lows of August. Some, like the major

US indices, have climbed back to within

striking distance of their all-time highs.

The driver of this widening decou-

pling between asset prices and underly-

ing fundamentals has shifted from over-

confidence in central banks to hopes of a

durable resolution of trade tension

between China and the US, the world’s

two largest national economies.

Two types of dynamics are driving

such behaviour. The first is the growing

influence of algorithms coded to look

for favourable trade comments from

American and Chinese officials. Once

they move the markets — as they inevi-

tably do — there is a tendency for retail

investors in particular to be pulled in.

Yet more than the occasional partial

and ad hoc signal is required to sustain

upward moves in prices. You need both

durable tension resolution and greater

adoption of pro-growth policies at

national, regional and global levels. The

baseline on trade continues to point to a

further escalation in tension notwith-

standing the occasional ceasefire.

Meanwhile, the headwinds to growth

comingonly grow stronger. And do not

look for global policy co-ordination to

act as a counter. The last G7, with its dis-

tinct lack of a collective statement, let

alone collective action, highlighted the

poor state of multilateralism.

Economic concerns are particularly

relevant for Europe where uncertain

politics n the largest five economiesi

continue to hinder the implementation

ofpro-growth policies, be they struc-

tural or cyclical. The more these coun-

tries slow, the bigger the challenges for

other countries and the greater the pres-

sure on the dollar to appreciate.

That increases the prospects of two

other risks also under-appreciated by

markets: a currency war on top of the

trade tension and financial instability

undermining economic activity.

Mohamed El-Erian is Allianz’s chief

economic adviser and president-elect of

Queens’ College, University of Cambridge

Investors show too

much confidence in

US-China trade deal

The risk is rising that

economic fundamentals

will fail to validate already

elevated asset prices

SEPTEMBER 6 2019 Section:Markets Time: 9/20195/ - 18:34 User: stephen.smith Page Name:MARKETS2, Part,Page,Edition:EUR , 20, 1