World stocks were set for their seventh straight day of losses on Monday, as investors nervy about the possibility of a prolonged U.S. government shutdown and a worsening global economy opted for the safety of bonds and gold.
MSCI’s world equity index, which tracks shares in 47 countries, was 0.15 per cent lower on the day and down almost seven per cent in the past seven sessions — its worst stretch of daily losses since January 2016. The index is also just off its lowest level since March 2017.
“There are a whole number of factors that have triggered this latest risk off climate, including the Fed’s very modest deviation from its (rate hiking) plan and the government shutdown in the United States,” said Investec economist Philip Shaw.
The U.S. Senate has been unable to break an impasse over U.S. President Donald Trump’s demand for more funds for a wall on the border with Mexico, and a senior official said the shutdown could continue until Jan. 3.
“We may get some clarity on several factors in early 2019 starting with a clearer line of sight on the prospect for a resolution in U.S.-China trade dispute, but until there are some nerves flying around,” Investec’s Shaw said.
So much so that U.S. President Donald Trump’s Treasury secretary called top U.S. bankers on Sunday amid an ongoing rout on Wall Street and made plans to convene a group of officials known as the “Plunge Protection Team.”
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U.S. stocks have fallen sharply in recent weeks on concerns over slowing economic growth, with the S&P 500 index .SPX on pace for its biggest percentage decline in December since the Great Depression. The Nasdaq has fallen nearly 22 per cent from its Aug. 29 high.
European stocks followed Asian bourses lower, with a pan-European index lower half a per cent on the day and a shade away from a one-year low hit on Friday.
This added to a similar move in MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS, though losses were limited as many bourses were either shut or set to close early ahead of Christmas.
By 1000 GMT, Britain’s FTSE 100 .FTSE had fallen 0.5 per cent, while France’s CAC .FCHI and Spain’s IBEX .IBEX had eased 0.9 and 0.5 per cent respectively. Germany’s DAX and Italy’s FTSE MIB were shut for Christmas.
“Markets (are) still under pressure from last week’s more hawkish Fed update, exacerbating fears about slowing growth and more expensive refinancing following years of stimulus,” said Mike van Dulken, head of research at Accendo Markets.
The political uncertainty has only added to the air of risk aversion, punishing equities to the benefit of bonds. Ten-year Treasury yields were near their lowest since August at 2.789 per cent US10YT=RR, having fallen over 40 basis points in just six weeks.
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The gap between two- and 10-year yields has shrunk to only 14 basis points, a flattening of the curve that has sometimes heralded economic turning points in the past.
“Many of the financial and economic indicators that turn first around business cycle peaks are now flashing red in advanced economies,” warned Simon MacAdam, global economist as Capital Economics.
“This is consistent with our view that the recent loss of momentum in the world economy will develop into a more severe slowdown in 2019.”
The flight to safe havens again boosted the Japanese yen, with the dollar near a three-month trough at 111.02 yen JPY= on Monday. It fared better against the euro, which was undermined by a run of poor European data. The single currency hovered at $1.1399 EUR=, after being as high as $1.1485 last week.
Against a basket of currencies, the dollar index was a shade softer at 96.745 .DXY.
Gold too has regained its appeal, holding near recent six-month peak XAU= around $1,262.6300 per ounce.
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