Overview: Yesterday’s 3% drop in the Nasdaq is setting the tone for today. The US stock market advance had been led by a narrow group of equities, and those have come under strong pressure amid slower consumer demand and stricter export control. Asian equities were a sea of red today. Chinese markets led the sell-off with more than a 2% drop. In Europe, the Dow Jones Stoxx 600 is for a fifth session. It is off nearly 4.7% since November 8, when this leg down began. It has only gained in one session since then. Of note, Italian bank shares are off for a fifth session. They have risen in two of the past 12 sessions, and over this run, the Italian bank share index has lost about a quarter of its value. Current indications warn that the S&P 500 is poised to gap lower. Peripheral European bond yields are higher, as they trade with risk assets, while core bond yields and the US 10-year Treasury yield is slightly softer. The US dollar is mostly firmer, though the Swiss franc and Japanese yen are finding support amid the equity slump.
Asia Pacific
Bank of Japan Governor Kuroda stuck to his stance. Negative interest rates are still needed. He dismissed as an academic paper claiming that ending negative interest rates could help lift inflation as not being representative of BOJ thinking. Although he recognized that there was little chance of reaching the inflation target in FY19 or FY20, he continued to sound optimistic. The BOJ forecasts average core CPI (excluding fresh food) of 1.4% in FY 19. Many investors are less sanguine. The decline in oil prices and mobile phones and free nursery school warns of less rather than more price pressures.
The minutes from the Reserve Bank of Australia’s recent meeting did not shed much fresh light on the policy outlook. Essentially, the RBA said that the next move in rates is more likely to be higher than lower, but there is no strong case for a near-term move. RBA Governor Lowe indicated he was watching slumping housing prices closely in Sydney and Melbourne. The IMF’s outlook was more concerning. It said the balance of risks were on the downside due to slowing world growth and rising trade tensions.
