While you were sleeping: IMF cuts growth outlook

Wednesday 8th October 2014

Equities on both sides of the Atlantic dropped, along with oil, after a report showed Germany’s industrial output slumped more than expected in August, while the International Monetary Fund downgraded its forecasts for the global economy.

The euro-zone’s engine economy is spluttering. A government report showed German production, adjusted for seasonal swings, sank 4 percent in August, after increasing 1.6 percent in July. August’s drop was the biggest in more than five years, and came a day after another government report showed the country’s industrial orders suffered their largest monthly slide in five years as well.

"The number was very weak, which makes for a tough backdrop. I don't think this is a trend of something that will get horrible, but it is weak and current valuations demand that data be better than weak," Hayes Miller, the Boston-based head of asset allocation in North America at Baring Asset Management, told Reuters.

The euro dropped as much as 0.6 percent to US$1.2584 after the report, before recovering to US$1.2654.

In late afternoon trading in New York, the Dow Jones Industrial Average dropped 0.73 percent, the Standard & Poor’s 500 Index slid 0.70 percent, while the Nasdaq Composite Index shed 0.78 percent.

Slides in shares of Caterpillar and those of Boeing, down 1.9 percent and 1.4 percent respectively, paced the decline in the Dow.

In Europe, the Stoxx 600 finished the session with a 1.5 percent drop from the previous close. The UK’s FTSE 100 Index fell 1 percent, Germany’s DAX retreated 1.3 percent, while France’s CAC 40 slumped 1.8 percent.

The IMF slashed its global economic growth forecast to 3.3 percent for this year and 3.8 percent for 2015, from its July estimates for 3.4 and 4 percent, respectively.

“Downside risks have increased since the spring,” the IMF said in its World Economic Outlook report. “Short-term risks include a worsening of geopolitical tensions and a reversal of recent risk spread and volatility compression in financial markets. Medium-term risks include stagnation and low potential growth in advanced economies and a decline in potential growth in emerging markets.”

“Downside risks related to an equity price correction in 2014 have also risen, consistent with the notion that some valuations could be frothy,” according to the IMF.

Investors are eyeing the US third-quarter earnings season, which unofficially begins when Alcoa reports earnings after the market closes on October 8.

“We don’t have earnings data to drive us yet this week and let’s face it, that’s the meat and potatoes of the market,” Karyn Cavanaugh, the New York-based senior market strategist at Voya Investment Management, told Bloomberg News.

Meanwhile, Rio Tinto rejected a takeover offer from Glencore, made in July, that would have created the world’s largest miner. Glencore said it may renew its courtship of Rio but not for six months as required by UK law.

“The pressure is on Rio now,” Chris LaFemina, a mining analyst at Jefferies, said in a report, Bloomberg reported. “If Rio management does not deliver material capital returns to shareholders, as promised, or if the iron ore price sharply falls next year, Rio could become much more vulnerable.”

BusinessDesk.co.nz

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