Global Markets Update Monday, 25 March 2019

Posted on 25 Mar 2019

Global stocks rallied on confirmation of the Federal Reserve’s monetary policy U-turn, but ended the week lower amid fears of a deepening economic slowdown. In contrast, bonds rallied sharply over the week.

United Kingdom

The FTSE 100 slipped 0.3% over the week.

It was another frantic week in UK politics, which saw Brexit delayed by at least two weeks. John Bercow, the Speaker of the House of Commons, ruled that the Prime Minister could not present her EU withdrawal agreement to MPs again without material changes. At a meeting with EU leaders, Theresa May secured a short extension to Article 50 until 22 May – providing her deal is ratified by the UK parliament. If her deal fails to secure parliament’s backing, the UK has until 12 April to present a way forward or will need to leave the EU without a deal. 

As widely expected, the Bank of England kept rates on hold. The central bank indicated that uncertainties over Brexit were too great to provide a clear forecast for the outlook for the UK economy.
UK retail sales jumped by a stronger-than-expected 0.4% in February. The surprise increase in February follows a similar rise during January when sales rose by 0.9% after an exceptionally weak December. There was little sign that stockpiling was the driving factor behind the jump in February as food sales were the only sub-category to see sales decline over the month.

UK inflation rose to 1.9% in February, up from 1.8% in January. 

The number of people in work rose by a larger-than-expected 220,000 in the three months to the end of January, the biggest rise since November 2015. This helped push the unemployment rate down to 3.9%, the lowest rate since 1975. Average earnings growth slowed to an annual rate of 3.4% in the three months to January, down from an upwardly revised figure of 3.5% in the fourth quarter of 2018.

US

The S&P 500 slid 0.7% over the week.

The Federal Reserve signalled it will refrain from raising interest rates for the rest of the year, warning that “recent indicators” pointed to “slower growth of household spending and business fixed investment”. It also said it will slow the monthly reduction of its Treasury holdings starting from May with a cut from $30 billion to $15 billion and will cease trimming its balance sheet in September.

Worldpay was acquired by Fidelity National Information Services for $43 billion.

Europe 

The Eurofirst 300 dropped 1.3% over the week.

The flash estimate of the eurozone composite purchasing managers’ index fell back to 51.3 in March, down from 51.9 in February. The manufacturing component fell to a five-year low of 47.7 in March, compared to 49.4 in February.

The IHS Markit German manufacturing purchasing managers’ index slumped to 44.7 in March, from 47.6 in February. This is the lowest reading in more than six and a half years.

The IHS Markit composite purchasing managers’ index for France dropped to 48.7 in March from 50.4 the previous month, with both factory and services sectors moving back into contraction Europe continued.

The Norwegian central bank raised interest rates by 25bps to 1.0% and signalled that it may raise rates again as early as June. The move, which is out of step with the more dovish tone in other developed economies, was prompted by a stronger-than-expected growth outlook for 2019, helped in part by higher oil prices.

Japan

The Nikkei 225 rose 0.8% over the week. 

The Nikkei-Markit Japan manufacturing purchasing managers’ index held at 48.9 in March, remaining close to its lowest level in three years.

Japan’s exports fell 8.4% in January compared with a year earlier, the steepest decline since October 2016, with China the biggest culprit.

Japan’s core consumer price index, which excludes fresh food prices, rose 0.7% year on year in February, compared to 0.8% in January Headline inflation was 0.2% higher while core-core inflation, which strips out both fresh food and energy prices, rose 0.4%.

Pacific Basin

Singapore’s exports rose 4.9% in February, ending three months of falls. The data raised hopes that south-east Asian economies could end up as beneficiaries of the US-China trade dispute.

Emerging Markets

Brazil’s benchmark Bovespa stock index touched 100,000 points for the first time in its history, amid growing optimism about the reform agenda of newly-elected President Jair Bolsonaro.

Former Brazilian president Michel Temer was arrested in corruption probe. Mr Temer, who was replaced as president by Jair Bolsonaro on January 1, is the second former Brazilian leader to be arrested as part of the investigation, following the detention and subsequent conviction of Luiz Inácio Lula da Silva in April last year.

Bonds

The yield on the 10-year US Treasury bond fell back below 2.5%, its lowest level since January 2018, while the yield gap between two- and 10-year US Treasury bonds fell to just 5bps, sinking below the previous low of 15bps hit in January to notch its lowest level since 2007. 

The difference between the three-month and 10-year yields turned negative for the first time since August 2007 – such an occurrence has preceded every US recession since the second world war. 

The yield on the 10-year German Bund fell below zero for the first time since October 2016 following exceptionally weak purchasing managers’ index readings for March.

UK government bonds rallied by the most since Theresa May’s government faced a bout of resignations four months ago, reflecting the intense nerves over Brexit with negotiations reaching a critical stage. Yields on the 10-year gilt fell to 1.06%. 

Currencies

Emerging market currencies weakened, led by the Turkish lira as an unexplained drop in foreign reserves fuelled speculation the central bank was using its holding to prop up the currency ahead of this month’s elections.