Investors drop risk after US GDP data

Friday 21:30 BST. Markets are selling off risk after US GDP growth in the second quarter came in lower than expected, though anxiety lessened as markets digested the mixed bag of data.

The FTSE All-World index is down 0.2 per cent and the S&P 500 index closed up a fraction after a session spent mostly in negative territory. Two-year US Treasury bonds touched a new record low yield, and the yen saw new highs for the year.

Economists had forecast second-quarter GDP growth in the US of 2.5 per cent, but it was revealed on Friday to be 2.4 per cent, on slower-than-anticipated consumer spending. The US also revised its first-quarter growth upwards, from 2.7 per cent to 3.7 per cent.

“The details suggest growth may have been weakening more than expected from a higher base,” said Sebastien Galy, currency strategist at BNP Paribas in New York. He said the yen could rise to its 2009 post-crisis high below Y85 to the dollar.

However, components of the index such as business spending – up 17 per cent in the second quarter, compared with a 7.8 per cent rise in the first quarter – matched or exceeded expectations. A report on industrial activity in the midwest, the Chicago PMI, also topped forecasts, a good economic surprise for a country that has seen few of late.

“The outlook...might not be quite that bad, but neither does a rapid rebound in consumption growth appear to be on the cards,” said Paul Dales, US economist at Capital Economics.

European markets are also down following the continent’s own mixed economic data, a turnround from recent trends, including slower German retail sales. The Eurofirst 300 index of big companies ended down 0.3 per cent, though “peripheral” European debts pared their losses.

Though the month is ending on a whimper, consider that the FTSE All-World in July is on track for its best month in a year as perceptions of European risks ebb and company earnings prove strong.

Yet the market’s holding pattern in the past week is telling. Traders seem to be in search of more certainty in the US, the world’s largest importer economy. Certainty both in terms of the pace of recovery and policy. On Thursday a regional US Federal Reserve president raised the spectre of a “Japan-style outcome”, and mentioned the possibility of quantitative easing.

Note that Japanese shares, heavily reliant on exporting companies, have nosedived in the past two sessions as export businesses warned of a third-quarter slowdown. Even in Europe, where economic news has been surprisingly good of late, traders are highly sensitive to the US economy. It is exports, after all – thanks in large part to a cheap euro – that have helped German manufacturing activity move to expansion and unemployment fall to its lowest level since 2008.

• Europe. A bit of economic data weakness knocked markets at their open. Spanish unemployment ticked up higher than forecast and German retail sales were reported to have fallen more than expected in June. Eurozone unemployment and inflation both matched expectations exactly – at 10 per cent and 1.7 per cent respectively.

In notable earnings, French construction giant Lafarge beat analysts’ profit projections but lowered its forecast. Renault and Michelin also came in well, with the carmaker’s sales rising and the tyre maker’s margins at record levels. France’s Cac 40 index was down 0.2 per cent, while the the UK’s FTSE 100 index was down 1.1 per cent. Germany’s Dax was up 0.2 per cent.

• Asia. Regional bellwether Samsung Electronics echoed Nissan and Hyundai, reporting a strong second quarter but warning that second-half profits would not be as strong. Japan’s Nikkei 225 was down 1.6 per cent as the yen strengthened, making Japan’s exports more expensive. Japanese industrial production and inflation figures also came in lower than expected.

The FTSE Asia-Pacific was down 0.4 per cent, with across-the-board losses. The Hang Seng index in Hong Kong slipped 0.3 per cent and the Shanghai Composite index dropped 0.4 per cent, coming off a two-month high. Australia’s S&P/ASX 200 was lower by 0.7 per cent.

• Currencies. Traders are selling risky currencies against the safe-haven yen. The New Zealand dollar is down 0.1 per cent against the yen, and the South African rand is also down 0.1 per cent. The yen is up 0.4 per cent against the US dollar, at Y86.44.

The euro is down 0.7 per cent against the yen, tumbling in the afternoon in spite of the unemployment and inflation figures. But the single currency is down just 0.3 per cent to $1.3037 against the dollar, paring losses as traders flee the dollar post-GDP figures. The pound is up 0.5 per cent against the buck at $1.5684.

• Debt. US Treasuries are seeing their heaviest demand in several sessions, with the 10-year yield down 7 basis points to 2.91 per cent. Two-year bonds are down 2 basis points at 0.55 per cent, at one point hitting a new all-time low yield of 0.54 per cent. The curve is also flattening: 30-year bond yields are down 9 basis points.

Japanese 10-years were down 1 basis point to yield 1.05 per cent.

Core German 10-year Bund yields were down 5 basis points as European investors embraced safer assets, at 2.67 per cent. Credit default swap spreads are mixed, seeing widening for Spain, Ireland, Italy and Portugal but narrowing for Greece. Greek two-year bond yields are up just 5 basis points, from a peak of 24 basis points earlier. Portuguese debt is also being sold off, though Spanish bonds are in demand.

• Commodities. US crude oil is up 0.8 per cent to $78.95 a barrel in a late reversal. A week of inventory expansion has driven up supply, and put pressure on prices. The US has reported a growing excess in its markets, a sign of a moderating economy.

Gold is up 1.1 per cent to $1,181 an ounce. Deflationary fears in the US have counteracted the declining view of lending and currency risk in Europe. Bullion has risen as the week has worn on. Also affecting the price, as the FT reported, was a swap between the Bank for International Settlements and big European banks.

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