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Economic growth concerns unnerve equities; sovereign bonds gain


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Economic growth concerns unnerve equities; sovereign bonds gain

➤ Asian, European markets drop on weak economic data.

➤ Sterling weakens as EU remains firm on draft Brexit deal.

➤ Eurozone business activity growth hits multiyear low.

➤ German Bunds, U.S. Treasurys gain.

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Global stocks came under pressure and U.S. equity futures drifted lower, while sovereign bonds gained, amid economic growth concerns from China to the eurozone.

Chinese stocks snapped three days of gains, with Hong Kong's Hang Seng Index falling 1.62% and the Shanghai SE Composite losing 1.53%, as retail sales growth in China dropped to its lowest level since 2003 in November, while industrial production growth also eased. Japan's Nikkei 225 index dropped 2.02% and South Korea's KOSPI Composite slumped 1.25%.

The weakness in economic data from Asia raises concerns that any progress in the U.S.-China trade negotiations might be too late to prevent further economic weakness in 2019, Michael Hewson, chief market analyst at CMC Markets UK, said in a daily note. The White House is reportedly planning to officially delay raising tariffs on Chinese imports to March 2019 from Jan. 1, 2019, as initially planned. Meanwhile, the Chinese finance ministry said after markets closed that retaliatory tariffs on vehicles from the U.S. will be removed for three months starting next year.

The declines extended to Europe, which saw its own batch of weak economic data. The Stoxx Europe 600 index dropped 0.90%, while Germany's DAX shed 1.00% and France's CAC 40 was down 0.98%, as data pointed to business activity growth in the eurozone dropping to its lowest level in more than four years. Private-sector output contracted for the first time in 2.5 years in France, as businesses faced widespread disruption due to the "yellow vest" protests.

Meanwhile, Deutsche Bundesbank cut its 2018 and 2019 GDP growth forecasts for Germany. The move comes in light of the European Central Bank's decision to lower its growth outlook in the eurozone for 2018 amid political tensions and the threat of trade protectionism.

As the ECB yesterday confirmed plans to end its net asset purchases and pledged to keep interest rates on hold at least through summer 2019, "the question is how much policy can be normalized further in a slow economic environment," according to Bert Colijn, senior economist for the eurozone at ING.

The euro fell 0.56% against the dollar, while sterling depreciated 0.55%. European Union leaders reiterated that the draft Brexit treaty is not up for renegotiation as British Prime Minister Theresa May sought further clarifications on the Irish backstop agreement and tweaks to the Brexit deal during an EU summit yesterday.

The Chinese yuan dropped 0.26% versus the dollar, while the Japanese yen ticked up 0.02%. The dollar index, which measures the currency's performance against a basket of peers, rose 0.48%.

In the bond markets, Treasurys rose as 10-year yields fell 3 basis points to 2.885%, while German Bund yields dropped 2 basis points to 0.262%. U.K. Gilts also gained as 10-year yields fell 2 basis points to 1.136%, while Italian government bond yields were broadly unchanged at 2.97%.

In commodities, Brent crude oil slipped 0.52% to $61.13 per barrel on the ICE Futures Exchange. The International Energy Agency left its short-term oil demand growth outlook largely unchanged and expects global oil production growth to slow as OPEC members and some non-OPEC countries look to stabilize prices and bring the market toward balance.

Gold dropped 0.39% to $1,242.50 per ounce.

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The day ahead:

8:30 a.m. ET — U.S. retail sales (Econoday consensus: 0.1% monthly)

9:15 a.m. ET — U.S. industrial production (Econoday consensus: 0.3% monthly)

9:45 a.m. ET — U.S. PMI composite flash

10 a.m. ET — U.S. business inventories (Econoday consensus: 0.6% monthly)

1 p.m. ET — U.S. Baker-Hughes rig count