China trade shock rattles European stocks, commodities

LONDON: World stock markets stumbled and commodities took a hit on Monday after a shock contraction in Chinese trade pointed to deepening cracks in the world's second-biggest economy and sparked fresh fears of a sharper slowdown in global growth.

Latest data from China showed imports fell 7.6 percent year-on-year in December when analysts had predicted a 5 percent rise, while exports dropped 4.4 percent, confounding expectations for a 3 percent gain.

The data reinforced fears U.S. tariffs on Chinese goods were starting to hit China's cooling economy, while softening demand has been felt around the world with sales of goods ranging from iPhones to automobiles slowing, prompting profit warnings from the likes of Apple and Jaguar Land Rover.

The index of Europe's leading 300 shares slipped 0.7 percent in early trade to 1,365 points. Germany's DAX  and France's CAC fell around 0.6 percent, with shares in European luxury goods companies and the automotive sector suffering some of the biggest declines.

"We believe trade growth next year will slow significantly on huge uncertainty and high base," Citi analysts wrote in a note, predicting China's exports and imports to fall 5.1 percent and 6.8 percent respectively this year.

"Significant uncertainty remains as to whether there could be a 'deal' after March 1," they added.

The falls in Europe followed hefty declines in Asia where MSCI's broadest index of Asia-Pacific ex-Japan shares lost  around 1 percent from Friday's 1-1/2 month high - its biggest single-day percentage drop since Jan. 2. Chinese  and Hong Kong shares suffered the worst hits.

U.S. futures showed no let-up on the horizon, with Nasdaq e-mini futures pointing to a near-1 percent fall for U.S. tech stocks while industrials looked to open 0.8 percent softer.

COMMODITIES SUFFER

The prospect of slowing global growth also roiled commodity markets, with oil prices slipping 1 percent   and industrial metals copper and aluminium losing ground in both London and Shanghai.

Meanwhile safe havens trades benefited from the equity pullback with U.S. 10-year Treasury yields falling to as low as 2.6690 percent - their lowest level in a week - while gold prices gained.

The world's two largest economies have been in talks for months now to try and resolve their bitter trade war, with no signs so far of any substantial progress in negotiations.

Some analysts expect China's latest data to provide impetus to Beijing to resolve the trade dispute with Washington.

Though Citi analysts said even with the rising probability for both sides to reach an agreement, the tariff and trade disruption appears to have already rippled through the global economy.

"The regional trade growth appears to have slowed substantially after front-loading effect diminished," they said.

In the wake of the trade dispute, China's policymakers have already pledged to step up support this year, following a raft of measures in 2018 including fast tracking infrastructure projects and cuts in banks' reserve requirements and taxes.

In currency markets, the yuan held broadly onto recent gains in both onshore and offshore trading. The Chinese currency had recorded its best week in more than a decade last week.

However, this could change, said Tim Graf, head of macro strategy EMEA at State Street.

"The weakness in the Chinese data is calling into question the recent strength of the renminbi," said Graf. "The downside for dollar/Chinese yuan is limited and that has implications for the euro and the Aussie dollar."

The dollar index as measured against a basket of currencies nudged 0.1 percent lower to 95.598 percent. However, the Australian dollar and New Zealand dollar - both gauges of global risk appetite - softened more than 0.4 percent in early trading.

The euro was subdued as it hit key technical levels after data from Italy on Friday showed the euro zone's third-largest economy was at risk of recession. The single currency was last at $1.1474.

Britain's pound was marginally lower at $1.2826 at the start of what is expected to be a tumultuous week as Prime Minister Theresa May seeks to win a vote in parliament on Tuesday to get her Brexit deal approved. The numbers are not in May's favour and her chances of winning the vote look slim.

For the U.S. trading day ahead, banks will be in sharp focus as they kick off the earnings season. Quarterly results from Citigroup are due on Monday followed by JPMorgan Chase , Wells Fargo, Goldman Sachs and Morgan Stanley later in the week.

Expectations are dour with profits for U.S. companies forecast to rise 6.4 percent, down from an Oct. 1 estimate of 10.2 percent and a big drop from 2018's tax cut-fuelled gain of more than 20 percent.

Investor attention was also on the U.S. government shutdown, now in its 24th day, and with no resolution in sight.