China shares suffer biggest fall since February; US jobless claims still high - as it happened

Graeme Wearden

from on 2020-07-16 15:41 (#55S7G)

Rolling coverage of the latest economic and financial news

4.41pm BST

And finally, European stock markets have ended the day with modest losses.

In London, the FTSE 100 has ended 0.67% lower, losing 41 points to 6250, after a subdued day (as summarised here)

European stocks end the day in negative territory, pausing for breath after yesterday's vaccine-fuelled rally

Stoxx 600 closes down 0.46%, London's FTSE 100 down 0.62%

Stocks handed back some of yesterday's gains amid a sluggish trading session. The mixed data from China overnight ensured that equities got off to a negative start. On a quarterly basis, the Chinese economy grew by 11.5%, and that was a massive rebound from -9.8% registered in the first quarter. The June retail sales figures showed there was negative growth of 1.8%, and that undershot the 0.3% forecast. Some people questioned the headline growth reading in light of the poor retail sales numbers - which have been in territory in the quarter in question - hence why stocks didn't drive higher on the back of the growth number.

The uninteresting update from the ECB didn't inspire traders. Rates were kept on hold, and so was the PEPP - meeting forecasts. Christine Lagarde, ECB chief, said the rate of the bond buying has eased a little, but she added that unless there is a big surprise in terms of an economic rebound, the full stimulus package will be used. European governments are divided over the 750 billion rescue fund, as some are in favour the 2:1 grant to loan ratio, while others are opposed. Getting approval would be crucial to the region's recovery. Ms Lagarde said the ECB is working on the assumption that it will be approved.

3.49pm BST

More bad news for the UK economy -- 1,000 jobs could be at risk at Pizza Express, as the restaurant chain prepares to close up to 75 outlets.

My colleague Sarah Butler has the details:

The restaurant chain is lining up a company voluntary arrangement (CVA) - an insolvency process which allows it to exit stores and cut rents - linked to talks with bondholders over its heavy debt burden.

Founded in 1965 in Soho, London, Pizza Express is now ubiquitous on British high streets, with 470 UK restaurants and a further 150 outlets internationally. It employs 8,000 people in the UK.

Because the PE firm that owns it loaded it up with debt: flatters their performance (and very, very tax efficient for Pizza Express)

3.16pm BST

Time for a quick recap.

China's economy has returned to growth, with official figures showing GDP grew by 3.2% year-on-year in April to June. Industrial production strengthened, encouraging Beijing officials to predict they were confident on the economic recovery in the second half of this year".

2.44pm BST

The US stock market has opened in the red, with the Dow Jones industrial average losing 162 points or 0.6% to 26,707.

2.39pm BST

ECB president Christine Lagarde has also predicted that Covid-19 will have a major impact on global trade, for two reasons.

First, there is the mechanical impact. As the pandemic rolls around the world, with some nations worse hit than others, export-led are suffering as potential customers are locked down.

Some of those countries who were relying on trade are having to reconsider, and to rely more on their domestic market rather than exports.

Consumers will be more attentive to the origin of goods, the place of manufacturing.

And corporates themselves, who had been largely dependent on far away supply chains, or very complicated and fragmented supply chains, suddenly rediscover the benefit of proximity.

2.19pm BST

The rise in Covid-19 cases in the US is worrying the European Central Bank.

ECB chief Christine Lagarde was just asked about the surge of infections in America in recent weeks, at her press conference in Frankfurt.

We have taken account of the environment in which the euro are zone operates

We have taken into account the potential risk of a second wave and a measures that could be taken as a result of that.

ECB President Lagarde says the 'second wave' in the US is a concern

Aaaand cue debate on whether this is still the first wave or not

No sign of relief in US Covid-19 data for July 15. New cases pulled back slightly on Wed, but remain close to a record high. Meanwhile, the daily change in US fatalities rose to a 6-day high, suggesting that the downtrend has ended and a new rebound may be in progress: pic.twitter.com/gI4vzJu4Yi

1.48pm BST

Worryingly, the recovery in US unemployment seems to have fizzled out.

As Bloomberg's Joe Weisenthal shows, the number of people losing their jobs and filing fresh welfare claims has only been falling slowly for weeks. There was virtually no improvement at all last week.

Here's the chart of weekly jobless claims. You can see improvement has almost totally stalled out. Smallest sequential decline since the crisis began. https://t.co/7Zi1SFXy0G pic.twitter.com/kgzaA5o5Xj

1.38pm BST

Economists are disappointed that so many Americans are being forced to file new claims for unemployment welfare, four months after the lockdown began.

Here's some snap reaction to the initial claims report:

Seven straight weeks of all-in initial claims plateauing.

And still at insanely high levels pic.twitter.com/FvcRdZgeDe

At 1.300M, Initial Jobless Claims came in just above the 1.250M estimate, but just below last week's 1.310M level; this was the 15th weekly decline. Claims peaked on 3/28 but remain VERY high. https://t.co/gJpV1ldX37 pic.twitter.com/u8q0dUTYcf

Initial unemployment claims for last week came in at 1.3 million (1.5 million without the dodgy seasonal adjustment), which is still more than twice as high of a rate of *new* job losses than ever experienced before.

Ongoing job losses on this scale will eventually cause the unemployment rate to rise, even from its current elevated rate.

The prospects for a rapid economic recovery are rapidly receding.

1.36pm BST

Newsflash: 1.3 million Americans filed new claims for unemployment support last week, as the Covid-19 pandemic forced some states to lock down again.

The weekly initial jobless claims total barely fell week-on-week - dipping to 1.3m from 1.31m a week ago.

Mixed results from the claims data, with initial jobless claims barely declining and remaining above the consensus estimate at 1.3mn, while continuing claims fell to a lower-than-expected 17.3mn pic.twitter.com/7gaxHDzCMk

1.12pm BST

Economists reckon the European Central Bank is slipping into wait and see' mode, while it assesses the state of the eurozone economy.

The ECB also wants to see the results of tomorrow's EU summit on the Recovery Fund. Can politicians square their differences and agree a 750bn package, or will arguments about shared debts and whether to hand out grants or loans scupper it?

As the ECB switches to the wait-and-see' mode for the rest of the summer, the focus shift towards the Recovery Fund and the long-term budget. This week's Summit might not bring a final agreement just yet, but any progress on the most contentious issues, including governance and conditionality, would send a strong signal on the prospects for the breakthrough in the near future."

The decision to leave interest rates unchanged and keep the powder dry was no surprise to FX markets. The main area of focus remains on the upcoming leaders meeting in Brussels and the form in which the blocwide support package will take, until then we can expect the euro to keep testing it's recent upward momentum, particularly against the dollar.

12.51pm BST

Newsflash from Frankfurt: The European Central Bank has left eurozone interest rates at their current record lows.

That means the headline rate remains just 0%, with banks charged negative interest rates of -0.5% for leaving cash in the ECB's vaults.

The Governing Council will continue its purchases under the pandemic emergency purchase programme (PEPP) with a total envelope of 1,350 billion.

These purchases contribute to easing the overall monetary policy stance, thereby helping to offset the pandemic-related downward shift in the projected path of inflation. The purchases will continue to be conducted in a flexible manner over time, across asset classes and among jurisdictions. This allows the Governing Council to effectively stave off risks to the smooth transmission of monetary policy.

#ECB leaves all rates unchg as expected: Main refi at 0%, Depo rate -0.5%. Keeps Pandemic Bond-Buying Program at 1.35tn. PEPP flexible regarding to time, asset classes, countries. Reinvest maturing PEPP bonds at least through end-2022. PEPP will run at least through end Jun21. pic.twitter.com/ExocTPqgzV

12.24pm BST

ING economist Iris Pang has hiked her growth forecasts for China, while also warning that the recovery could be bumpy.

She writes:

The biggest risk we see is the technology war, not just with the US but also with the rest of the world. China has put a lot of money into R&D in advanced technology to achieve self-reliance on the most advanced semiconductor chips but it will take time to yield results.

When things look too good I usually take another look. China's 3.2% positive GDP growth on a yearly basis worth taking a second look when retail sales were shrinking, infrastructure investments were slow. I find out why it is a posive GDP growth. #China https://t.co/tuhW9FOUTT

12.15pm BST

Ed Moya of OANDA thinks investors are being too pessimistic about the drop in Chinese retail sales:

China's economy is back into growth territory following steady stimulus and relatively strong success in battling COVID-19. The rebound in China however is mostly on the industrial side and not the consumer. The Chinese retail data however is not as bad it seems, as automobiles, catering, jewelry, and petroleum goods were the main categories that posted declines.

The decline in cars, which is about 10% of the retail sales value was mainly attributed to the strong base it had a year ago.

12.08pm BST

Reuters is reporting that Nissan will cut its car production worldwide sharply this year, due to the pandemic.

It's another sign that the world economy is weak, with the lockdown denting demand for travel, consumers nervous about big purchases, and production lost to factory shutdowns.

Nissan Motor Co is planning a 30% year-on-year cut in global vehicle production through December as falling demand due to the coronavirus complicates its efforts to recover profitability, two sources with knowledge of the matter have told Reuters.

Japan's No. 2 automaker plans to produce around 2.6 million vehicles between April and December, down from 3.7 million during the same period last year, the sources said.

11.59am BST

Here's my colleague Richard Partington on today's worrying UK jobs data:

Paid employment in Britain has plunged by almost 650,000 employees since the onset of the coronavirus pandemic in March, official figures show, as growing numbers of companies cut jobs.

According to the Office for National Statistics, the number of payroll employees fell by 2.2%, or 649,000, from March to June. However, it said the rate of decline in employment slowed in June compared with May.

11.43am BST

Analysts at trading firm XM also see a V-shaped recovery in China's GDP figures today:

As far as V-shaped recoveries go, China's economic recuperation from the coronavirus couldn't look more V-shaped. Gross domestic product (GDP) jumped by 11.5% over the quarter to June after collapsing by almost 10% in the first quarter.

Year-on-year growth also returned to positive territory, with GDP rising by 3.2%, well above forecasts of 2.5%.

But rather than be reassured by the upbeat headline numbers, investors finally seem to be touching base with reality as the warning signs that the global recovery will be a bumpy one continue to grow. Up until now, the resurgence of virus infections in several countries had failed to dent hopes of a speedy and robust recovery. But the slow pickup in domestic demand in China appears to have dealt a major blow to those expectations.

Retail sales in China fell on an annual basis for the fifth straight month in June, suggesting consumers are not yet feeling confident enough to revert to their pre-pandemic spending habits.

11.21am BST

Getting back to the Chinese growth figures, economist George Magnus argues that China is enjoying a V-shaped recovery.

He's written an interesting Twitter thread analysing the 3.2% annual growth recorded in April-June:

China GDP thread: Q2 estimate out puts GDP 3.2% up over the year. The V-shape is alive and well in China. Others take note? As this chart from CE illustrates 1/n pic.twitter.com/9Tq94Dne9P

The quarterly rise, seas adj, was +11.5%, more than offsetting the prior 10% slump. In the entrails, production and construction have recovered strongly, services and demand much less so but overall the economy is back from the dead. June data showed more 2/n

Bigger stimulus and faster credit creation than are being acknowledged are fuelling a decent comeback in infravstruture and some other investment tho mfg and property still soft. June capex esp infra was a stonker. Retail sales were less negative y/y than in May. 3/n

So the dichotomy between output and demand still there. I remember plummet officially dropped from 5.9 to 5.7% and the number of migrant workers not yet back at work is now much smaller. 4/n

So between February and June, china's roller coaster economy is now quite clear. Where to next? The momentum of growth will almost certainly slow from this bounce and is contingent on stimulus. Aggregate financing is growing 3 x as fast as GDP. So watch this space esp. ends

10.59am BST

The UK is gearing up for a record-breaking year for government debt sales.

The Treasury announced this morning that the Debt Management Office will raise 385bn through sales of gilts, from April to November this year -- more than in any year before.

The higher volume of issuance seen so far this year due to COVID-19 is not expected to persist over the final four months of the year.

Pandemics are pricey things. pic.twitter.com/QHN6b7HE2x

10.38am BST

Covid-19 has also taken a chunk out of Europe's trade surplus.

Exports from the EU shrank by 29.7% in May, year-on-year, to 129.8bn. France and Greece suffered the biggest plunges, according to new data from Eurostat this morning.

10.19am BST

Over in Amsterdam, brewing giant Heineken's revenues have turned sour due to the Covid-19 crisis.

People have been enjoying a pint since the dawn of agriculture, and they're not going to stop any time soon. This summer has been painful for Heineken, and the balance sheet may force some hard decisions in the future, but in the long run we think they'll do just fine.

The brands are still strong and, though it may take some time, once the pubs get back into full swing profits should pick back up."

10.06am BST

Hong Kong's stock market also had a rough day, dropping 2% - its worst drop in a month.

US-China tensions are bubbling away - plans by the White House to impose travel restrictions on millions of Chinese Communist party members is the latest in the saga.

9.57am BST

The markets continue to demonstrate a one step forward, one step back behavioural pattern,says Russ Mould, investment director at AJ Bell.

Weighing on global markets was new data from China which showed its economy returned to growth in the second quarter of 2020, but domestic consumption and investment remained weak.

On the UK market, technology, miners and consumer stocks were the main culprits for the index retreating. Energy, telecoms and utilities were the only sectors making any progress.

9.51am BST

European stock markets are being dragged down today too.

The main indices are all in the red, with Britain's FTSE 100 losing 0.8% or 50 points at 6243.

Progress on vaccines and drug treatments is one of the reasons we retain a positive outlook on equities, as it helps underpin the case for controlling the virus without a return to full lockdowns.

However, we continue to see geopolitical risks generating volatility, including the US election and US-China tensions."

9.44am BST

Ironically, China's better-than-expected growth in the last quarter could also be hurting stocks today.

The economic rebound in Q2 could encourage Beijing to tighten policy, having hiked government spending and poured money into the economy to ward off the slump.

Policy will remain supportive, but the pace of loosening may moderate given the strong credit expansion of the past months and the recent market surge.

9.17am BST

Today's slump means China's stock market has now lost over 7% since Monday, when it hit a five-year high.

9.04am BST

Oof! China's stock market has just suffered its worst one-day fall in five months.

The CSI 300 benchmark index has tumbled by 4.8% today to a 10-day low, as a burst of selling rattled the exchanges.

Even with positive GDP growth?... the reality is that the message is not positive: consumption is not back nor is disposable income @YuanTalks https://t.co/A3IcqyWmfr

Maybe today there's some kind of realisation that while the industrial side of the economy is really being driven by fiscal stimulus, the consumer side of the economy is a bit more problematic,"

8.44am BST

China has also hit back at the UK for banning Huawei from its superfast 5G mobile network.

In a stern warning, the commerce ministry says the decision will make China warier of investing in the UK, and pledged to take measures in response....

Britain's discriminatory" ban on Huawei has severely damaged China's investment confidence in the country, China's commerce ministry said on Thursday, adding it will take necessary measures to defend Chinese firms' legal rights.

Prime Minister Boris Johnson on Tuesday ordered Huawei equipment to be purged completely from Britain's 5G network by the end of 2027.

The spokesman of Ministry of Business said, China will take necessary measure to retaliate UK blocking Huawei 5G.

8.40am BST

This chart from Bloomberg shows how China's economy returned to growth in April-June, but still weak in historic terms:

8.34am BST

Stephen Innes, Chief Global Markets Strategist at AxiCorp, has put his finger on the problem with today's Chinese economic data -- consumers aren't really spending yet.

China's Q2 GDP growth beat consensus expectation, which is unambiguously positive for risk sentiment. But its what under the hood that matters most.

China's economic data for June and Q2 show that it's easier for it to normalize the supply side of the economy with industrial production +4.8% y/y, than the demand side with retail sales -1.8% y/y, after the covid-19 shock.

8.30am BST

Louis Kuijs, head of Asia economics at Oxford Economics, is optimistic that China's economy will avoid shrinking again this year, due to solid domestic demand.

Kuijs explains (via the FT):

In China the story is very reliant on what is happening domestically.

The momentum should be strong enough to make it quite unlikely [we] see another fall in GDP.

While in general it's fair to say that the numbers beat expectations, what the numbers also reveal is that we're seeing that the China consumer remains behind in terms of the recovery story.

China's Q2 GDP surprised on the upside with a reading of +3.2% yoy (vs. +2.4% yoy expected). Only 2 out of 28 economists on Bloomberg had pencilled in an above +3% print.

Bloomberg highlighted that public investment swung to growth of +2.1% yoy in 1H, after contracting in the first 5 months. China's 1H GDP growth now stands at -1.6% yoy (vs. -2.4% yoy expected). Alongside GDP we saw the other main data releases for June with industrial production rising in line with expectations at +4.8% yoy while YtD fixed asset investment came in at -3.1% yoy (vs. -3.3% yoy expected).

Year-on-year growth 3.2% in Q2/20, but GDP still 1.6% smaller than in Q4/19. Consumer demand remains weak.
(And yes, usual caveats about the Chinese GDP numbers. Our own estimate tomorrow.)

China's Economy Returns to Growth Amid Global Virus Struggle ["https://t.co/zx72sPXgXY"]

8.13am BST

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

#China grew 3.2% in Q2 YoY, recovering from record 6.8% contraction in Q1. Has avoided recession. But debt problems piling up. In H1 2020, lenders issued record $1.7tn in fresh loans. In past, China outgrew bad debts, but that's unlikely to work this time. https://t.co/0gAjobxdY5 pic.twitter.com/mJgqyLbvfB

We are confident on the economic recovery in the second half of this year,"

China GDP grew +3.2% in Q2 (April-June) after contracting by -6.8% in Q1, avoiding a recession. Driven by industrial production +4.8% in June, +4.4% in May. But retail sales -1.8% in June, -2.8% in May. Fixed asset investment -3.1% in Jan-June. https://t.co/sww2iz8wsW

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