Global Markets Update Monday 22 October 2018

Posted on 22 Oct 2018

Investors remained cautious, with heightened diplomatic tensions between the US and Saudi Arabia, as a result of the disappearance of journalist Jamal Khashoggi, adding to ongoing trade war worries, political risks in Italy, Brexit concerns, and more hawkish comments from the US Federal Reserve.

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United Kingdom

The FTSE 100 rose 0.8% over the week.

Consumer price inflation eased to 2.4% in September, down from a six-month high of 2.7% in August.

Retail sales fell 0.8% in September, pressured by a steep fall in food sales. Annual retail sales growth slipped to 3.0% in September.

Unemployment held steady a 4% in the three months to August, but wage growth rose by 3.1%, the fastest pace in nearly a decade.

US

The S&P 500 gained 1.1% over the week.

Minutes of the latest FOMC meeting heightened expectations that the Fed would raise rates above the level continued to be neutral, showing that the Fed thought that policy should become ‘modestly restrictive’ for a time. Policymakers said it might become necessary to temporarily boost rates above levels they expect in the longer run to prevent inflation from getting too hot and ward off risks of financial excesses.

US retail sales rose just 0.1% in September, well below forecasts.

US housing starts fell by a larger-than-expected 5.3% in September, due in part to the impact of Hurricane Florence. 

Industrial production rose 0.3% in September.

Netflix withstood broad weakness in the popular FAANG stocks, as investors welcomed news that the company had added almost 7 million subscribers in the third quarter.

Goldman Sachs and Morgan Stanley reported robust earnings, although BlackRock shares sank when it revealed that inflows had shrunk to a two-year low.

Europe

The Eurofirst 300 rose 0.8% over the week.

The European Commission said the Italian coalition government’s budgetary plans would result in a breach of budgetary rules that was ‘unprecedented’. In response, Moody’s lowered its rating of Italy’s sovereign debt to one level above sub-investment grade. Italy’s leaders vowed to stick with the plans, stating they had no intention of leaving the euro.

The CSU (Christian Social Union) and Social Democrats (SPD) parties, Angela Merkel’s coalition allies, suffered steep declines in the Bavarian elections, which saw the Greens and far-right Alternative for Germany (AfD) gain significant shares of the votes.

Shares of Daimler, the parent company of Mercedes, fell to a five-year low after it issued its second profit warning this year.

Japan

The Nikkei 225 slid 0.7% over the week.

Japan’s exports fell 1.2% year on year in September, the first fall in two years. Imports were also lower than expected, rising 7.0% on a year-on-year basis: the increase is largely due to the increase in oil prices.

 

Pacific Basin

China’s GDP expanded by 6.5% in the second quarter compared to a year earlier, the slowest quarterly pace of growth since the first quarter of 2009. The data is the first since the start of US tariffs in July. Nevertheless, Chinese equities rallied sharply as the authorities provided an upbeat assessment of the economy. In addition, China escaped being labelled as a currency manipulator by the US Treasury.

Chinese industrial output rose by a lower-than-expected 5.8% year on year in September, while fixed-asset investment and retail sales for the month came in slightly above forecasts.

 

Bonds

The yield on the 10-year US Treasury bond closed the week at 3.20%, while the yield on the 10-year German Bund ended at 0.46%.

The yield on the 10-year Italian government bond hit a four-and-a-half year high of 3.78% during the week, with spreads over German Bunds reaching 333 basis points, the widest since the eurozone debt crisis in 2013. The sell-off also spread to other peripheral eurozone bonds.