Stocks rise as IMF warns of slower global trade growth

Stocks on Wall Street and in Europe rose along with warnings that global growth is slowing.

Senate testimony from US Federal Reserve chairman Jerome Powell confirmed that strong domestic economic growth and stable inflation would eventually see a rise in short-term interest rates.

He wants inflation to stay around 2% and says the economy is “just shy” of hitting that point.

US government bond yields edged up in reaction, after falling in the lead up. The benchmark 10-year Treasury was at 2.862% compared with 2.856% on Monday. 

In trade-related news, the leaders of Japan and the European Union signed a deal to create one of the world’s largest liberalised trade zones.

The deal will eliminate some €1 billion ($2 billion) in tariffs for European companies annually and double that amount for Japanese exporters to the 28-member bloc.

Mr Powell touched on global trade tensions, saying he thinks countries that are open to trade have grown more quickly.

Investor survey turns negative
An investors survey takes a dim view of the effect of the US-led tariff war on global growth, with 60% of investors saying it poses the greatest risk to markets.

For the first time since the China-inspired market turmoil of early 2016, a clear majority of the fund managers surveyed by Bank of America Merrill Lynch (BAML) don’t expect global growth to accelerate over the next 12 months.

The International Monetary Fund’s latest review says it still expects the world economy to grow at a healthy clip this year and next but warns the “risks to the outlook are mounting.”

Its forecast of 3.9% growth for both years is unchanged from the April outlook and represents the best back-to-back period of growth since 2010 and 2011.

IMF chief economist Maurice Obstfeld calls the trade tensions “the greatest near-term threat to the world’s growth.”

He says if current trade policy threats are realised, they will reduce global growth 0.5% below current projections in 2020 – a sum amounting to hundreds of billions of lost economic output.

“Trade actions to date, while they are indeed broadly negative, they frankly apply to a rather small range of exports,” Mr Obstfeld adds.

The IMF forecasts the US economy will expand 2.9% this year, unchanged from its April estimate. It has lowered its forecasts for the eurozone and Japan by 0.2 percentage points each. 

Tariffs war fallout
The monthly BAML survey took place from July 6-12, a period when the US and China imposed tariffs on $US34 billion worth of each other’s exports and ended with the Trump administration threatening levies on a further $US200 billion in Chinese goods.

“It’s a 180-degree turn in sentiment” since stocks zoomed higher at the start of the year, BAML chief investment strategist Michael Hartnett says.

“But it’s probably not yet a full capitulation because if that were the case we’d see cash allocation rising, which we don’t.”

On Wall Street, the Dow Jones Industrial Average closed up 55.53 points, or 0.2%, to 25,119.89. The S&P 500 rose 0.4% to 2809.55 and the tech-focused Nasdaq Composite climbed 0.6% to 7855.12.

Netflix misses estimates
Mr Powell reassuring remarks took eyes off Netflix, whose slumping shares provided the market’s biggest news.

After the market closed on Monday, Netflix reported new subscriber growth for its recent quarter had fallen short of estimates, prompting the shares to fall 14%. However, the stock recovered to be 5.7% down in on-market trading.

Netflix blamed its subscriber miss on faulty internal forecasting and not on business reasons, like recent price increases. The company has had such guidance problems in past quarters, missing forecasts three times in the past 10 quarters, each causing gyrations to its share price.

Among the companies whose shares rose after earnings were Johnson & Johnson and Progressive. Strong sales of J&J’s cancer drugs and other medicines helped boost its revenue and earnings, pushing shares up 3.6%.

Progressive, meanwhile, posted a sharply higher profit as the insurer continued to see growth in active policies and net premiums written. Its shares climbed 2.3%.

Goldman Sachs names new CEO
But shares of Goldman Sachs, the latest large US bank to release second-quarter earnings, slid 1.2%. Despite reporting strong profits, Goldman’s revenue fell below analysts’ expectations.

It also said David Solomon would succeed Lloyd Blankfein as chief executive starting October 1.

“There’s no reason to expect anything but impressive headline numbers,” Legal & General Investment Management head of asset allocation Emiel van den Heiligenberg says.

“While solid earnings growth will not come as a big surprise to most investors, it should provide a positive backdrop to markets in the coming weeks at a time where sentiment seems neutral to slightly bearish.”

US oil prices fell to their lowest in nearly a month, as selling continued after Monday’s sharp drop on expectations that global producers will bring additional crude oil to market.

Crude futures for August delivery declined 0.9% to $US67.46 a barrel while Brent crude, the global benchmark, was flat at $US71.88 a barrel.

The Stoxx Europe 600 added 0.2%. France’s CAC 40 also rose 0.2%, Germany’s DAX gained 0.8% and the UK’s FTSE 100 was up 0.3%.

In Asia, Japan’s Nikkei Stock Average closed up 0.4%, helped by a weak yen, but Hong Kong’s Hang Seng and the Shanghai Composite slumped 1.3% and 0.6%, respectively.