GLOBAL MARKETS UPDATE - MONDAY 2 OCTOBER 2017

Posted on 02 Oct 2017

Despite a raft of weaker-than-expected data and lower-than-expected inflation, the Federal Reserve and Bank of England indicated there would likely to raise rates before the end of the year.

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United Kingdom

The FTSE 100 rose 0.9% over the week.

Mark Carney confirmed that the Bank of England is close to raising interest rates at its November meeting, saying that they would rise so long as there was not a sudden and unexpected deterioration in economic data.

UK second-quarter GDP growth was revised down to an annualised pace of 1.5%, from an earlier estimate of 1.7%. This is the slowest annual pace since the second quarter of 2013. On a quarter-on-quarter basis, growth remained the same at 0.3%.

The Office for National Statistics said the UK service sector contracted by 0.2% in July, due to a drop in activity in the film industry following a particularly strong June. In the three months to July, the service sector grew by 0.5% compared with the previous three months, the highest quarter-on-quarter growth in 2017 so far.

London house prices have fallen for the first time in eight years, the Nationwide says, dropping 0.6% year on year in September. Across the UK, annual price growth slowed to 2%, down from 2.1% in August.

Unilever acquired personal care group Carver Korea for €2.27bn.

US

The S&P 500 gained 0.6% over the week, closing at a fresh record high. The Russell 2000 index of smaller companies also closed at record levels, outperforming larger companies over September as they are seen to be some of the major beneficiaries of plans to cut corporate taxes. 

Janet Yellen said that, despite tepid inflation, the US labour market continues to tighten at a rapid clip and the Fed should be “wary of moving too gradually” in tightening monetary policy. Following her statement, the probability of a rate rise in December rose to over 80%.

US second-quarter GDP grew at a 3.1% annual rate over the three months to the end of June, up from a previous estimate of 3.0% which itself was revised up from an initial estimate of 2.6%. The upward revision was due to higher consumer spending and state expenditure.

The core Personal Consumption Expenditure index, the Fed’s preferred measure of inflation, slowed to 1.3% in August, compared to 1.4% in July. This was the smallest year-on-year increase since October 2015.

Donald Trump announced plans for corporate tax reform including proposals to lower the corporate tax rate from 35% to 20% and a move to a “territorial” systems whereby US companies would mainly pay tax only on US earnings. Energy stocks are expected to be among the main beneficiaries of the proposals since they pay some of the highest marginal rates of tax in the US. Conversely, IT companies would be among those that benefit the least since they already among those that pay the least tax.

The University of Michigan consumer sentiment survey slid to 95.1 in September from 96.8 in August, with hurricanes Harvey and Irma blamed for the weaker reading.

Consumer spending rose 0.1% in August, compared to a rise of 0.3% in July. The slowdown was blamed on Hurricane Harvey.

Europe

The FTSE Eurofirst 300 rallied 1.3% over the week.

Angela Merkel’s Christian Democrat-led bloc emerged as the largest party in Germany’s elections, but with a lower share of the vote than had been expected. Instead, the far-right Alternative for Germany party won almost 13% of the vote, once more raising the spectre of the rise of populist parties in Europe. The vote is likely to jeopardise French president Emmanual Macron’s push for stronger fiscal integration in the eurozone and has heightened concerns over Italy’s elections in 2018.

The European Commission’s official economic sentiment indicator climbed to 113 in September, from 111.9 in August. The reading was the strongest since June 2007. At a national level, the Netherlands and Italy saw the largest rises.

The flash estimate of eurozone inflation held steady at 1.5% year-on-year in September, while core inflation fell to 1.1%, compared to 1.2% in August.

In Spain, Catalonia tried to press ahead with a referendum on independence from Spain, despite the Spanish government declaring the vote illegal.

Japan

The Nikkei 225 inched higher by 0.3% over the week.

Shinzo Abe called an early election to be held in on 22 October. The main opposition party, the Democratic Party which governed from 2009 to 2012, said it would not run any candidates. Instead its MPs will be able to seek nominations from the new challenger party, Party of Hope.

Japan’s retail sales rose 1.7% in August on a year-on-year basis, slowing slightly from the 1.8% growth seen in July. Meanwhile, household spending rose 0.6% year-on-year in August, recovering after the 0.2% fall seen in July.

Headline Japanese inflation rose 0.7% in August on a year-on-year basis, up from 0.4% in July. Core inflation, which excludes food, also rose 0.7% year on year, up from 0.5% in July and the highest rate of expansion so far in 2017, while core core inflation, which excludes both food and energy, rose 0.2%, up from 0.1% in July. 

Pacific Basin

The Asian Development Bank raised its forecast for GDP growth in developing Asia by 0.2% to 5.7% in 2017, helped by a rebound in global trade and improved prospects for China. India’ was the exception with growth expected to slow slightly in 2017 as the new goods and service tax dampens manufacturing.

South Korean industrial production rose 2.7% in the year to August, boosted by upswings in manufacturing and auto output.

In Taiwan, shares of Apple suppliers were hit by worse-than-expected sales forecasts for the iPhone 8, and delays to the production of the upcoming iPhone X due to problems with the optics used for face-recognition sensors. Hon Hai Precision and Taiwan Semiconductor Manufacturing were among companies hit.

New Zealand’s general election left the governing National Party just short of an outright majority. It looks likely that the National party will enter a coalition with the anti-immigration New Zealand First party – a n outcome that could limit growth going forward given the country’s relatively small population.

Bonds

The yield on the 10-year US Treasury bond touched 2.36%, its highest level since mid-July, before closing the week at 2.32%, a rise of 6bps over the week. The yield on the two-year note rose above 1.48%, its highest level in almost a decade.

The yield on the 10-year German Bund closed the week at 0.47%.

Currencies

Sterling posted its best month in nearly two and a half years, boosted by speculation that the Bank of England will raise interest rates in November.

The US dollar also posted its first monthly gain since February, helped by the Fed’s more hawkish stance.

Commodities

Oil touched a 26-month high amid rising demand and Turkey’s threat to disrupt oil flows from Iraq’s Kurdistan region.