Financial industry, Economic and Earnings :: World finance

Solid Asia factory growth caps a strong first quarter but outlook cloudy

Factories across much of Asia posted another month of solid growth in March, rounding off a strong quarter for the world's manufacturers, even as exporters fear a rise in U.S. protectionism could snuff out a global trade recovery. China again led the way, with an official manufacturing index expanding at the fastest pace in nearly five years, while factory surveys on Monday showed encouraging growth as well in Japan, India and much of emerging Asia. Higher commodities prices have helped boost the value of exports, along with a global thirst for electronic gadgets, but many countries are reporting stronger sales volumes as well, even as the new Trump administration starts to flex its muscles on trade. “Asia's economic backdrop remains solid with most countries remaining above the key threshold level of expansion, though U.S. trade protectionism fears is the biggest uncertainty for now,” said Aidan Yao, an economist at AXA Investment Managers in Hong Kong. In China, the official Purchasing Managers' Index (PMI) on Friday rose to 51.8 in March from the previous month's 51, thanks to a months-long construction boom which is helping to boost resources prices around the world. That was the strongest reading since April 2012, though a private survey focusing on smaller firms painted a slightly more cautious picture, raising questions about whether the export recovery can be sustained. Julian Evans-Pritchard, an economist at Capital Economics in Singapore, believes the strength in China won't last, reckoning a flurry of measures to cool its overheated property market and central bank policy tightening will lead to a slowdown in investment and industrial activity in coming quarters. But the biggest risk for China may be brewing halfway across the world, with U.S. President Donald Trump due to hold his first meeting with counterpart Xi Jinping in Florida later this week.

Trump foreshadowed the risk that those talks could be tense, tweeting on Thursday that the United States could no longer tolerate massive trade deficits and job losses. On Friday, Trump sought to push his crusade for fair trade and more manufacturing jobs back to the top of his agenda by ordering a study into the causes of U.S. trade deficits and a clampdown on import duty evasion. The failure of the new U.S. administration to push through healthcare reforms last month has also added to global worries that Trump will struggle to pass much-anticipated tax cuts and fiscal spending plans which could boost demand in the world's largest economy. Delays to the reflationary plans could see U.S. orders and global investment moderate in coming months as businesses grow more cautious.

AS GOOD AS IT GETS? While China has strong domestic demand to fall back on, at least for now, other export-reliant Asian economies are more vulnerable if Trump goes on a trade offensive. Japanese factory activity expanded at a solid clip of 52.4 in March, though at a slightly cooler pace than in the previous month as growth in new export orders and output slowed. Its modest economic recovery has been driven largely by a resurgence in exports, which are helping to offset stubbornly sluggish demand at home.

In South Korea, where exports account for half of the economy and domestic demand is similarly weak, readings have been decidedly mixed. Factory activity shrank for an eighth straight month and at a faster pace than in February, prompting factory owners to cut jobs at the fastest pace since the global financial crisis, a private survey showed. But official trade data at the weekend showed the country's exports grew more than expected in March, albeit at a more modest pace than in February. Similar activity surveys later in the global day are expected to show robust factory activity in the United States and Europe. Bolstering expectations of increasing resilience in the global economy, data last week showed U.S. inflation rising at its fastest pace in five years despite some sluggishness in consumer spending. In Europe, preliminary PMI readings had indicated businesses across the euro zone ramped up activity at the fastest pace in almost six years in March to meet burgeoning demand that came despite sharper price rises. But Britain’s data may offer a slightly more mixed picture.

Trump tax cut doubts hit stocks, lift yen vs. dollar

Shares fell on Wednesday, driving investors to the safety of government debt, gold and the yen, as doubts grew that U.S. President Donald Trump can deliver on a promise of tax cuts that had powered stocks markets to record highs. Wall Street was expected to open slightly lower, index futures showed ESc1 SPc1 1YMc1, and the CBOE's VIX index . VIX, known as the "fear gauge", briefly topped 13 percent for the first time since mid-January. European shares hit two-week lows and Asian equities suffered their biggest one-day fall since Dec. 15. After sharp falls on Tuesday, MSCI's world stocks index . MIWD00000PUS fell half a percent for its biggest two-day drop since the same date. The dollar touched a four-month low against the Japanese currency, whose strength helped push Tokyo stocks to a three-week low, while the euro held close to its highest since early February at around $1.08. Investors' flight to safety pushed down U.S. Treasury yields and the gap between U.S. and German 10-year government borrowing costs hit its narrowest since November. Waning risk appetite also hit commodities: Brent crude oil LCOc1 fell more than 70 cents to as low as $50.05 a barrel, its cheapest since Nov. 30. Copper CMCU3 fell 0.7 percent to $5.736 a ton. The main factor behind the sell-off in risky assets was doubt that Trump would be able to deliver on his agenda for economic growth, including tax cuts and relaxed regulation, any time soon. In the first major legislative battle of his presidency, Trump is trying to rally Republican lawmakers behind a plan to dismantle Obamacare, and investors worry failure could spell trouble for the promised tax cuts and regulatory changes.

Societe Generale currency strategist Alvin Tan, in London, said an FBI investigation into possible ties between Trump's campaign and Russia was also adding to investor worries."All in all, that’s adding to a picture that the much hoped-for and hyped fiscal stimulus package may not be coming as soon as markets would like it to come, if at all," he said. The pan-European STOXX 600 index was last down 0.6 percent, having earlier dropped as much as 0.9 percent, led lower by banks . SX7P and miners . SXPP. Britain's FTSE 100 index . FTSE fell 0.8 percent. MSCI's broadest index of Asia-Pacific shares outside Japan . MIAPJ0000PUS fell 1.4 percent at one point. In the previous session, the index hit its highest level since June 2015.

Japanese stocks . N225 fell 2 percent, Australian shares tumbled 1.6 percent and mainland Chinese shares closed down 0.5 percent. MSCI's main measure of emerging market equities . MSCIEF slid nearly 1 percent. The dollar, which has risen this year in anticipation of a boost from Trump's tax reform, edged up 0.1 percent against a basket of currencies . DXY. However, the greenback was down 0.3 percent at 111.32 yen JPY=, having earlier hit a four-month low of 111.12 yen. The euro EURO= dipped 0.2 percent to $1.0790, off a high of $1.0818 as European trading began. Sterling GBP=D3 fell 0.2 percent to $1.2450, having earlier hit $1.2507, its strongest in nearly four weeks.

TREASURY YIELDS U.S. Treasury yields, which fell on Tuesday along with Wall Street, dropped further. The 10-year benchmark yield US10YT=RR dipped below 2.4 percent for the first time since March 1. It last stood at 2.41 percent, down 2.2 basis points on the day. In early trade, the closely watched gap between U.S. and German 10-year yields touched its narrowest since November at around 195 basis points. German 10-year yields DE10YT=RR, the benchmark for euro zone borrowing costs, then fell further and were last down 3.8 basis points at 0.42 percent."Market participants are worried about the effects and feasibility of Donald Trump's growth program," DZ Bank strategist Birgit Figge said. "Alongside this, speculation is persisting ... that the ECB may possibly scale back its ultra-expansionary policy stance to some extent at an earlier point in time than is currently being assumed."Gold hit a three-week peak of $1,248.47 and last traded up 0.2 percent at $1,247 an ounce. It has rallied almost $50 from last Wednesday's low after a less hawkish policy statement than many investors had expected from the U.S. Federal Reserve. For Reuters Live Markets blog on European and UK stock markets see this site/url=this site

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