IMF pessimism, trade tensions trigger global equities’ free fall

Pessimism about global growth drove down world shares and commodity markets on Tuesday and left investors seeking refuge in the dollar, government bonds and gold.

The International Monetary Fund’s warning of a darkening outlook on Monday after China’s confirmation of its slowest growth rate in nearly 30 years and amid more head-scratching over Brexit continued to weigh on the mood.

European shares had followed Asia into the red with disappointing earnings from Swiss bank UBS also adding extra gloom after Europe’s banking sector saw nearly 30 percent wiped off its value last year.

In its World Economic Outlook report, the IMF predicted the global economy would grow at 3.5 percent in 2019 and 3.6 percent in 2020, down 0.2 and 0.1 percentage point respectively from last October’s forecasts.

The downgrade mainly reflected signs of weakness in Europe, with Germany hurt by new car emission rules, Italy under market pressure due to Rome’s recent budget standoff with the European Union and Brexit hanging over the bloc as well.

“We have seen a little bit of a pull back, but whether it’s the IMF growth downgrade or China related is neither here nor there,” said CMC Markets’ senior analyst Michael Hewson.

He pointed to the strong and sudden rebound that markets like Germany’s Dax have seen since the end of December as well as other major global indexes.

“We are at the top end of the range for this year and given the global uncertainty, investors are probably taking the view that it is probably wise to take a bit of profit off the table.”

Futures markets were pointing to a weak start for the United States later with falls of 0.8 percent for the S&P 500 and nearly 1 percent for the Nasdaq seen.

Another development nibbling at sentiment was news that the United States plans to proceed with the formal extradition from Canada of Chinese tech giant Huawei executive Meng Wanzhou.

Meng, who is also the daughter of Huawei’s founder Ren Zhengfei, was arrested in early December at the request of the United States over alleged violations of sanctions on Iran. She was released on bail and is due in court in Vancouver on Feb. 6.

Asia’s overnight losses had been led by Chinese shares, with the blue-chip index off 1.2 percent. Japan’s Nikkei skidded 0.5 percent too, while Hong Kong and Sydney closed down 0.8 and 0.5 percent. [.SS][.T]

In another sign of risk aversion, the Australian dollar, often used as a liquid proxy for China investments, eased 0.4 percent to $0.7123, putting it on track for a third straight session of losses.

The same worries had also pushed the New Zealand dollar down for a seventh session and copper, which is used in everything from electrical wiring and water pipes to cars, drifting lower in the metals markets.

The dollar held at a near three-week high as investors sought the relative safety of the U.S. currency.

That kept the euro pegged back at 1.1360 and reapplied pressure on the main emerging market currencies following a decent start to the year for most of them.