Global Markets Update Monday 19 March 2018

Posted on 19 Mar 2018

Global stocks were boosted by the news that President Trump will meet Kim Jong Un within weeks, after North Korea offered to suspend nuclear and missile tests. However, after an initial bout of optimism for a potential easing of tension between North and South Korea, concerns over the possibility of a global trade war plagued sentiment as did further political upheaval in the White House.

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United Kingdom

The FTSE 100 rose 1.3% over the two-week period.

Chancellor Philip Hammond delivered an upbeat assessment of the UK economy in his Spring Statement, upgrading his growth forecast for 2018 from 1.4% to 1.5%. The Chancellor acknowledged there was room for easing austerity measures due to the improvement in public finances but said he would take “a balanced approach”, using any fiscal leeway to bear down on debt and keep taxes low as well as leaving modest room for extra public spending.

The IHS Markit services purchasing managers’ index rose to 54.5 in February. The reading was well above forecasts and, when combined with weaker manufacturing and construction sector readings, indicates that UK GDP is expanding at a steady pace of 0.4$ in the first quarter.

UK insurer Prudential is to divide itself into two: Prudential plc will become its Asian, Africa and US business, with M&G Prudential will be home to its UK-based insurance and asset management operations.

US

The S&P 500 rose 2.3% over the fortnight.

Donald Trump blocked Broadcom’s attempted $142bn takeover of rival chipmaker Qualcomm. He also formally adopted new tariffs on steel and aluminium imports from everywhere but Canada and Mexico while the renegotiation of the North American Free Trade Agreement continued. The move was widely criticised and raised fears it would offset the benefits of last year’s tax cuts, and led to the resignation of Gary Cohn, Trump’s top economic adviser.

In other political news, Rex Tillerson was sacked as US secretary of state and rumours circulated that national security adviser HR McMaster was next for the chop. TV pundit Larry Kudlow was appointed chief economic adviser, replacing Gary Cohn who resigned in protest over the implementation of tariffs on steel and aluminium.

The Senate passed sweeping changes to a swath of banking rules adopted in the wake of the 2008 financial crisis. The proposal provides long-awaited relief to thousands of community banks and dozens of regional lenders and will also loosen regulations for mortgage lenders. The legislation will now move to the House for approval.

The ISM non-manufacturing purchasing managers’ index slipped to 59.5 in February, although a surge in new orders to a 12-and-a-half year high pointed to underlying strength.

Headline consumer prices rose 0.2% in February, taking the year-on-year increase to 2.2%. Core consumer prices also rose 0.2%, leaving the year-on-year increase at 1.8%.

Non-farm payrolls rose by a stronger-than-expected 313,000 in February, the largest monthly increase since July 2016. The unemployment rate held steady at 4.1% but wage growth eased to 2.6% on a year-on-year basis, compared to a rise of 2.8% in January.

US retail sales fell 0.3% in February. This is the third consecutive month of declines, the first time this has happened in 5 and a half years.

Industrial production jumped by a greater-than-expected 1.1% in February.

The University of Michigan consumer confidence index rose to a 14-year high in March, helping to sooth concerns over the weak retail sales data.

Cigna, the US health insurer, is to acquire pharmacy benefits manager Express Scripts for $67bn.

Europe

The Eurofirst 300 rallied 2.8% over the two weeks.

At its latest policy meeting, the European Central Bank dropped its commitment to buy more bonds and expand its quantitative easing programme should growth disappoint. Mario Draghi reiterated that the ECB would not raise rates until “well past” the end of its bond-buying programme and that, when rates did rise, the path would be “at a measured pace” that took into account continued uncertainty about the size of the output gap and how wages responded

Italy’s general election resulted in an inconclusive result. The populist Five Star Movement recorded the largest number of votes for a single party, with slightly more than 30%. However, the centre-right coalition also claimed victory, but fell short of the overall 37% needed for an outright majority, although Silvio Berlusconi’s Forza Italia lost its leadership of the centre-right coalition. The result suggests a hung parliament is likely, raising the prospect of a negotiating period in which Italy’s parties try to form a coalition.

Eurozone 2017 GDP growth was revised down to 2.3% in 2017 from an initial estimate of 2.5%. While lower, this is still the fastest rate of expansion since 2007.

The IHS Markit eurozone composite purchasing managers' index fell to 57.1 in February, down from a near 12-year high of 58.8 in January. The composite index for Germany hit a three-month low, while both French and Italian indices also fell.

Headline eurozone inflation was revised down to a year-on-year rate of 1.1% in February, from an initial estimate of 1.2% and compared to a rate of 1.3% in January.

Eurozone industrial production fell by 1% in January. The figure was lower than estimates and compared to growth of 0.4% in December.

German exports fell 0.5% in January, the largest fall in seven months and far lower than expectations of a rise of 0.75%. Imports also fell. The data follows news that new industrial orders dropped 3.9% in January, compared to forecasts of a 1.6% fall, with both domestic and overseas orders sliding

Japan

The Nikkei 225 gained 2.4% over the two weeks.

Japanese core machine orders grew 8.2% over the month of January, the fastest pace in two years and bouncing back from a sharp fall in December.

Pacific Basin

Australia’s economy grew by a slower-than-expected rate of 0.4% in the final quarter of 2017 as a rebound in household consumption was offset by a fall in exports. The Reserve Bank of Australia held interest rates at 1.5%, citing low inflation and wage growth for its decision.

Chinese consumer prices jumped 2.9% year-on-year in February, a sharp rise from the 1.5% rate recorded in January. In part, the jump was attributed to the timing of the Lunar New Year.

Chinese industrial production grew 7.2% year-on-year in the first two months of 2018, the fastest pace of growth since June 2017. Urban fixed-asset investment was also stronger than expected, rising 7.9% in the first two months of 2018.

Bonds

The yield on the 10-year US Treasury bond closed at 2.85%. US bond investors remained unsettled by fears that China would offload its significant holdings of Treasury bonds in the event of an escalating trade war with the US.

Pharmacy chain CVS Health sold $40bn of bonds, the third largest sale on record, to fund its proposed acquisition of health insurer Aetna.

The yield on the 10-year German Bund closed at 0.57%. European corporate credit spreads (both investment-grade and high-yield) narrowed to the tightest level since the eve of the last financial crisis