Global Markets Update Monday 10 September 2018

Posted on 10 Sep 2018

US shares hit fresh highs, but elsewhere markets were generally weak as the sell-off in emerging market currencies continued.

The Citi Economic Surprise index, which measures data surprises relative to forecasts, predicts a turning point for the US relative to the eurozone. The US index surged from mid-February while the eurozone index lagged, but the fortunes have reversed since mid-June with the eurozone index now higher than its US counterpart.

The US and Mexico reached agreement on a free-trade deal to replace NAFTA.

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United Kingdom

The FTSE 100 slumped 3.7% over the three-week period. UK stocks underperformed their overseas counterparts. Sterling was volatile, weakening on news the UK government was preparing for a “no deal” Brexit and then strengthening amid reports that the EU’s chief Brexit negotiator Michel Barnier was close to offering the UK a deal. Mr Barnier said that “the EU was prepared to offer a partnership with Britain such has never been with any other third country” although he added that the UK must respect the core values of the EU. However, Mr Barnier later said he was strongly opposed to parts of Theresa May’s Chequers proposals.

The UK government issued documents providing advice in the event of a ‘no-deal’ Brexit.

Mark Carney confirmed he was in talks to stay on as Governor of the Bank of England to help smooth the Brexit process.

The IHS Markit/CIPS services purchasing managers' index rose to a higher-than-expected 54.3 in August, up from 53.5 in July. The equivalent survey for construction dropped to 52.9, down from July's reading of 55.8, while the manufacturing index hit a 25-month low.

Retail sales rose 1.3% in August compared to the same month the previous year as the extended heatwave drew to a close.

US

The S&P 500 rose 1.1% over the three-week period. US stocks hit a record high, with the S&P 500, Dow Jones, NASDAQ and Russell 2000 indices all reaching fresh peaks, and the market reached its longest-ever bull run, outstripping the 1999/200 bull run at the height of the dotcom boom.

In a speech in Jackson Hole, Fed chair Jay Powell signalled that US rates will be raised in both September and December, defying President Trump who commented he was “not thrilled” that rates were rising. He avoided commenting on trade wars and politics, saying instead that he saw “no clear sign” that inflation was accelerating above 2.0% and that there did not seem to be an “elevated risk” of the economy overheating. His comments were taken to be dovish.

President Trump threatened to impose tariffs on a further $200bn Chinese imports, withdraw the US from the World Trade Organisation and rejected an EU proposal to scrap car tariffs.

The US economy added a higher-than-expected 201,000 jobs in August, although data for July was revised lower. Wage growth picked up, with average wages increasing 2.9% on a year-on-year basis. The unemployment rate remained at 3.9%.

US second-quarter GDP growth was revised up to an annualised rate of 4.2%, from an initial estimate of 4.1%.

The ISM index of manufacturing activity came in at 61.3 in August, its highest since May 2004. The ISM non-manufacturing index surged to 56.8 in August, compared to 55.7 in July.

Measure of consumer sentiment were mixed. The Conference Board’s gauge of consumer confidence rose sharply in August, reaching its highest level since October 2000, helped by a strong jobs market. However, the University of Michigan’s measure of consumer sentiment dropped to an 11-month low, with rising prices and, to a lesser extent, interest rates cited as growing concerns for consumers.

Durable goods orders dropped 1.7% in July, matching the decline seen in June.

US new home sales fell for the second month in a row in July while existing home sales notched up four consecutive monthly declines.

Amazon joined Apple in breaking through the $1 trillion market capitalisation barrier.

Europe

The Eurofirst 300 slid 2.0% over the three-week period.

The final reading of the eurozone composite purchasing managers’ index for August was slightly stronger than the flash estimate, although manufacturing activity showed a weakening expansion and corporate optimism at a 23-month low.

The European Commission’s measure of eurozone economic sentiment eased in August, mainly due to a sharp drop in consumer optimism.

The Ifo Institute’s index of German business confidence rose to 103.8 in August, compared to 101.7 the previous month.

Eurozone inflation slid to 2.0% in August, down from 2.1% in July. Core inflation held steady at 1.0%.

Nevertheless, the European Central Bank appeared increasingly confident that inflation was on course to hit its target and that it could wean investors off the support offered by its asset-purchase programme.

German manufacturing orders fell 0.9% in July in a sign that trade tensions are affecting the eurozone’s largest economy. German retail sales also slid 0.4% in July.

A surge in support for anti-immigration right wing parties means that Sweden’s ruling Social Democrats are under threat in the country’s general election on 9 September.

Japan

The Nikkei 225 gained 0.2% over the three-week period.

Japanese retail sales increased in July at a 1.5% annual pace, marking the ninth consecutive month of gains.

Industrial production eased 0.1% in July.

Pacific Basin

Australia swore in its sixth prime minister in just over a decade as Scott Morrison replaced Malcolm Turnbull.

The Caixin/Markit purchasing managers’ index of Chinese manufacturing activity hit a 14-month low in August with export orders falling for the fifth month in a row. The official index of manufacturing activity showed a slight expansion

In Taiwan, manufacturing activity dropped to a two-year low in August, while Malaysia’s manufacturing sector saw its first expansion since January.

In Indonesia, manufacturing climbed to a two-year high in August but the Indonesian rupiah neared a three-year low against the US dollar, taking it close to levels seen in the 1998 Asian financial crisis. The country has twin trade and budget deficits, making it especially vulnerable to rising US rates.

Emerging Markets

Escalating crises in Argentina and Venezuela caused emerging markets to sell off. In the bond markets, yields on sovereign emerging market bonds are approaching levels last seen in 2006, while their US dollar-denominated counterparts are some 100bps below the levels seen 12 years’ ago.

Brazilian assets fell amid growing support for jailed presidential candidate Luiz Ignacio Lula da Silva. In contrast, the most pro-business candidate Geraldo Alckmin has performed poorly in the polls.

Turkey’s economy is being affected by the plunging currency and rising interest rates. A survey of business and consumer confidence from the Turkish Statistical Institute slumped from 92.2 in July to 83.9 in August with drop seen across all major industries. Inflation rose to

17.9% in August, causing the central bank to hint it may raise interest rates.

India’s second quarter GDP expanded by a stronger-than-expected 8.0% year-over-year. However, the rupee was not immune to the sell-off in emerging market currencies, sliding t a fresh record low against the US dollar.

The rand also weakened as South Africa slipped into its first recession since 2009 in the first half of 2018.

Venezuela devalued the bolivar by 95%. The country faces an escalating crisis, with inflation running at over 80,000% on an annualised basis.

Argentina raised rates by 15% to 60% in an attempt to halt the peso’s slide.

Bonds

The yield on the 10-year US benchmark bond fell as low as 2.83% - its lowest level since early July – before closing the period at 2.94%. The yield gap between two- and 10-year bonds slipped below 20bps for the first time in a decade in the wake of Jay Powell’s Jackson Hole speech.

The yield on the 10-year German Bund rose 9bps over the three weeks to 0.39%. In contrast, the yield on the 10-year Italian government bond moved back towards 3.25%, climbing to a three-month high, as concerns continued about the new government’s budgetary restraint and potential clashes with the EU.

Commodities

Oil rallied back towards $80 a barrel as investors anticipate that US sanctions against Iran will curtail supply.