Real concerns about the outlook for economic growth next year lie behind the latest heavy hit to international shares, with the Dublin market among those which suffered heavily.
The arrest of a senior executive in Chinese mobile company Huawei in Canada was widely cited as a factor in the share price falls internationally – and it certainty focused attention on the dangers of a trade war between the US and China. But big moves on government bond markets – which reflect the outlook for interest rates – show wider fears that the big international economic expansion which has supported share prices since after the crash may finally be coming to an end.
The heavy across-the-board fall in Irish shares on Thursday, with a drop of over 3 per cent in the Iseq index, was a reaction to international markets and not attributable to any specific domestic factor, according to dealers in Dublin.
However, the Irish market is now a hefty 24 per cent down on its high point for 2018, reached early in the year, a bigger fall than the 12-16 per cent typically seen on European markets. The fear of the impact of Brexit may be one factor here. Irish shares are still some 17 per cent ahead on a five-year view, but the latest hit will take its toll on investment portfolios and pension funds.
Often when markets are getting edgy about the general outlook and share valuations, a specific event focuses their attention. The arrest of the chief financial officer of Huawei, Meng Wanzhou, in Canada and the fact that the US is seeking her extradition due to charges relating to Iranian sanctions has focused attention on one of the risk factors – a trade war between the US and China.
Already the world's two biggest economies have exchanged tit-for-tat tariffs – special taxes on the imports of the other party – as president Donald Trump seeks changes in Chinese trade practices. The markets took heart when the US president and his Chinese counterpart agreed at a G20 summit last weekend to avoid further tariffs for 90 days and enter negotiations on a range of trade and security issues. The arrest has added to fears that this deal will quickly fall apart, with Beijing reacting furiously to the move.
Deepening trade war
A deepening trade war between the US and China would hurt both countries – US farmers have already been hit by Chinese tariffs on soybeans, while the US tariffs on $250 billion (€220bn) of Chinese goods is also taking its toll.
There is also a shaky truce between the US and EU on trade, but fears remain that this could also break, with the US president repeatedly threatening tariffs on European cars, a particular threat to Germany. Germany’s influential economic institutes have warned that an all-out trade war with the US could push Europe into recession.
Underlying all of this are wider fears about the outlook for global growth. The US economy is entering record territory in terms of the length of an economic expansion. The fact that growth has not been particularly strong had led to hopes that it can keep going, but recent indicators have been mixed and a notable change in the outlook for US interest rates suggests that investors are now having doubts about the outlook.
After an expected interest rate rise from the US Federal Reserve in December, market interest rates now suggest an expectation that there may – or may not – be one further rise next year, rather than the two previously anticipated.
EU growth is also slowing and government bond interest rates – including Irish rates – are also falling again. Unless EU growth picks up doubts will grow over whether the European Central Bank ( ECB) will be able to increase interest rates next autumn, as it has signalled it hopes to do. As well as trade fears, a manufacturing slowdown is increasing fears about the euro zone outlook, as – of course – is the uncertainty caused by Brexit.
Sparking a sell-off
As often happens when confidence is shaky, any news can spark a sell-off. Talk that an Opec oil production cut may not be enough to restore oil prices was taken as a reason to sell energy shares rather than as good news for inflation and other companies which use oil as an input. Money is flowing from riskier assets such as shares into safe havens, such as US and German government bonds, where prices rose, sending yields downwards.
It is unusual to see such a rapid change in the confidence about the growth outlook – and this is reflected in the big fall in share prices. Given the broad-based nature of the fears, this one probably has a way to run.