Global stocks, oil prices dive in 'perfect storm'

An oil jack pumps oil in a field near Calgary, Alberta, Canada.
An oil jack pumps oil in a field near Calgary, Alberta, Canada. PHOTO: REUTERS

NEW YORK (WASHINGTON POST, AFP) - World stock markets and oil prices slumped on Thursday (May 23) in a "perfect storm" of Europe elections, fresh economic gloom, the China-United States trade war, and beleaguered British Prime Minister Theresa May's decision to delay another key Brexit vote.

The Dow Jones industrial average plunged 448 points at its low before clawing back late in the day to finish at a loss of 286 points, or 1.11 per cent, driving it into negative territory for the week. If the Dow were to finish in the red for the week, it would be the fifth week in a row and the first such slump in eight years.

Technology continued to sink the blue chips as US President Donald Trump ratcheted up pressure on Chinese tech firms. United Technologies and IBM led the Dow Jones downward. Energy was hit by a steep drop in oil prices, dragging Exxon Mobil and Chevron with it. Energy, technology, industrials and financials were the biggest losers of 11 sectors. Utilities and real estate were the only gainers on the day.

All three major US indexes finished down more than 1 per cent as the US and China exchanged accusations over trade and amid the continuing fallout from Mr Trump's restrictions on doing business with Chinese smartphone giant Huawei Technologies. The Standard & Poor's 500 index dropped 1.19 per cent to close at 2,822. The technology-laden Nasdaq Composite dropped 1.58 per cent, finishing at 7,628.

"The markets (are) caught in a perfect storm of UK political turmoil, US-China trade warmongering and European economic softness," said Spreadex analyst Connor Campbell.

European and Asian markets also dived, with the European STOXX 600 dropping 1.4 per cent, the German Dax falling 1.8 per cent, and France's CAC 40 tumbling 1.8 per cent. China's tech-heavy Shanghai Composite closed down 1.4 per cent, while the Hong Kong Hang Seng Index dropped 1.6 per cent.

Mumbai's Sensex soared more than two per cent to break 40,000 for the first time ever as traders welcomed polls indicating business-friendly Prime Minister Narendra Modi's Bharatiya Janata Party (BJP) was on course to win another majority.

But London's FTSE 100 index lost 1.4 per cent at the close after the government postponed a crucial Brexit vote following an outcry from hardline Brexiters over concessions made by Mrs May - who faces intense speculation over her future.

The pound hit another four-month low as Mrs May faces being ousted over a revised plan to push through her Brexit agreement, which sparked the resignation of Cabinet member Andrea Leadsom.

The trade tensions have stymied global growth, resulting in a considerable pullback in corporate earnings estimates for all of 2019.

"The market is adapting to the fact that we are looking at much lower growth estimates," said Mr Chase Hinderstein, portfolio manager with The Wise Investor Group in Reston, Virginia. "Earnings estimates for the S&P have been reduced tremendously, to 3.2 per cent for this year compared to estimates of 7 per cent at the beginning of 2019 and 10 per cent last September."

Shares of the FAANG technology leaders - Facebook, Amazon, Apple, Netflix and Google-parent Alphabet - tumbled as more companies said they would abide by the restrictions against Huawei. Apple depends on China for a significant amount of its revenue.

The yield on the closely watched US 10-year Treasury had dropped to a 52-week low in a sign that investors were moving out of stocks to less risky assets. Bond yields move inversely to bond prices.

"It's all trade and tech," said Mr Ivan Feinseth, chief investment officer at Tigress Financial Partners. "Tech and hopes for a trade deal drove the market up. And now it's driving it down."

Meanwhile, surveys released on Thursday signalled economic weakness around the globe.

The closely watched Purchasing Managers Index, a key measure of industrial activity, showed slowdowns in the US, Japan and Europe as US-China trade anxiety rippled. A similar trend line is playing out in Germany, according to a survey by the German think tank Ifo Institute for Economic Research.

"Investors are re-evaluating the economy, not just the US but the global economy, with respect to new possibilities of restrictive trade and tariffs," said Mr Howard Silverblatt of S&P Dow Jones Indices. "We are starting to see companies react to the possibility of higher tariffs and higher prices over the long term."

Growth in US manufacturing reached a nine-year low, according to financial data released on Thursday.

Despite the past month's pullbacks, the Dow is still up nearly 9 per cent in 2019. The S&P 500 is ahead 12 per cent and the Nasdaq is up more than 14 per cent this year.

US stocks had been on a roll coming into May because of the strong US economy, which is thriving on low interest rates, record low unemployment and robust corporate earnings. The number of jobless claims last week unexpectedly fell, indicating a health economy and labour market. But external forces detoured the markets in recent weeks as anticipation of a US-China trade deal evaporated. The Federal Reserve also signalled that it probably will not raise interest rates this year, feeding more disappointment.

The US finds itself in a dangerous war of wills with the Iranian government over US sanctions against that country over its nuclear programme and the US belief that Iran is a supporter of terrorism. The Trump administration dispatched an aircraft carrier, bombers and other military equipment to the Persian Gulf region this month as tensions between the two countries escalated.

"After posting the third-best year-to-date return through April since World War II, the US equity markets were vulnerable to any potential setback," said Mr Sam Stovall, chief investment strategist at CFRA Research. "Investors were then greeted by disappointing news about rate cuts from the Fed and a breakdown in the much-anticipated culmination to the China-US trade discord."

Oil prices went into the steepest drop of 2019 on Thursday as US-Iran tensions appeared to ease. Key oil benchmarks declined more than US$3 each. US West Texas Intermediate dropped more than 5 per cent, to US$58.14 per barrel. Benchmark Brent crude pulled back 4.3 per cent, to US$67.92.

"There's obviously back-channel communications going on," Mr John Kilduff of Again Capital said. "The Trump administration is trying to tamp down the situation. The market rightfully built in several dollar of risk premium in the oil prices, and to the extent the tensions are easing, that premium is coming out."