Global Markets Update Monday 28 January 2019

Posted on 29 Jan 2019

Global stocks gained, boosted by signs that Beijing and Washington may be making progress in breaking the impasse in their trade dispute.

The IMF lowered its outlook for global growth in 2019, citing risks to the Chinese economy and Brexit.

Global Market Update

United Kingdom


The FTSE 100 slid 1.6% over the two-week period.


Theresa May won a vote of no confidence in her government, but her Brexit deal was roundly defeated by parliament with the prime minister losing by a far larger-than-expected 230 votes. With Plan B looking very much like Plan A, the prime minister faced a raft of amendments that could derail her strategy.


UK employment reached a record high of 32.54 million in November. Average earnings excluding bonuses increased by 3.3% in the year to November, meaning that real wages were growing at their fastest rate in two years.


UK retail sales fell by a greater-than-expected 0.9% in December as consumers brought forward their Christmas shopping to November. Retail sales rose 1.3% in November.


UK inflation fell to 2.1% in December, down from 2.3% the previous month and the lowest rate in nearly two years, due in part to lower petrol prices.

 

US


The S&P 500 gained 3.0% over the fortnight.


President Trump caved in and signed a bill to end the federal shutdown, without securing funding for his Mexican wall. The president faced further pressure when his long-term adviser Roger Stone was arrested as part of the Mueller probe, taking the total number to six now charged in the investigation.  

Existing home sales fell 6.4% month-on-month in December to the lowest level since November 2015. The news caused share prices of US housebuilders to slump.


Shares in Netflix have surged around 30% so far in 2019 despite underwhelming results.


Bank of America and Goldman Sachs delivered better-than-expected fourth-quarter results, but Citigroup disappointed while JPMorgan reported a sharp decline in fixed income trading revenues.
 

Europe 


The Eurofirst 300 rallied 2.2% over the two weeks.


Mario Draghi, president of the European Central Bank, acknowledged the downside risks to growth, fuelling talk of a possible shift in policy guidance.


The flash estimate of the eurozone composite purchasing managers’ index fell to 50.7, down from 51.1 in December. The reading was the lowest for 66 months.


Germany’s manufacturing purchasing managers’ index hit a 50-month low, falling to 49.9 in January and the first time in more than four years that manufacturing output was contracting.


Eurozone industrial production fell by 1.7% over November, the sharpest decline since February 2016. Germany, Ireland and Portugal saw large declines, while France, Italy and Spain also reported weak data.

 
The German economy grew by 1.5% in 2018, the weakest rate since 2013, but the country appears to have avoided a technical recession in the fourth quarter as strong domestic demand, as a result of robust employment, countered weaker export sales.


The Zew survey of German economic sentiment dropped to a four-year low of 27.6 in December.


The Ifo Institute’s business climate index, a closely watched gauge of German sentiment, fell to 99.1 in January compared to 101 in December. This was the lowest reading since March 2016.

Japan


The Nikkei 225 rose 1.1% over the two-week period.


The Bank of Japan kept its short-term interest rate target at minus 0.1% and reaffirmed its plan of buying Japanese government bonds to maintain yield on the 10-year note at around zero. However, the BoJ lowered its forecasts for core inflation to 1% to 1.3%, down from its previous forecast for a range of 1.5% to 1.7%.


Japanese exports fell 3.8% on a year-on-year basis in December, the fastest pace of decline in two years. Meanwhile, imports rose just 1.9% from a year ago, lower than expectations of a 3.7% rise.

Pacific Basin


China’s economy grew 6.4% compared to a year earlier in the final quarter of 2018, down from 6.5% in the previous quarter and taking the annual pace of growth to 6.6%, the slowest pace of growth since 1990.


Chinese exports slumped 4.4% in December, the largest fall since the end of 2016, while imports declined 7.6%. China reported an annual trade surplus with the US of $323bn, the highest since at least 2006, as exporters rushed to ship orders ahead of a threat of rising tariffs. Car sales in China, the world’s largest car market, also declined last year for the first time since 1990. In response to the weak data, China announced it would start to implement a package of measures to stimulate the economy. In addition, the People’s Bank of China injected a record $84 billion into the country’s banking system in a bid to boost liquidity and increase lending.


A raft of Asian countries reported a weak end to 2018 for exports. South Korea reported exports had fallen 14.6% year on year in the first 20 days of January, while Thailand’s exports shrank for the second month in a row. Other countries in the region whose exports shrank in December include Indonesia and Singapore.


Emerging Markets


Brazil’s stockmarket hit a record high, buoyed by optimism over the new Bolsanaro government who has promised radical measured to fix public finances.


Mexico successfully raised $2 billion in a sign that investors are looking beyond the policy mis-steps by the new leftist government and persistent fears over the future of Pemex, the state oil company.


Prices for Venezuela’s bonds jumped to their highest levels in seven months on hope that a regime change could be near after the US and several European countries recognised the country’s opposition leader Juan Guaidó as interim president.
 

Bonds


The 10-year Treasury bond closed on a yield of 2.75%, while the yield on the 10-year German Bund ended the week at 0.20%.


UK breakeven rates – the yield difference between nominal and index-linked gilts – have surged in a sign that investors are pricing in a sharp fall in sterling in the event of a no-deal Brexit. Such an eventuality would push up UK inflation.


US high-yield issuance picked up after 41 days without any issuance throughout December and early January. Power company Vistra Energy raised $1.3bn, casino real estate owner MGM Growth Properties raised $750m, hospital operator Tenet Healthcare raised $1.5bn and supermarket chain Albertsons raised $600m.
 

Currencies


Sterling rallied after the Brexit deal was defeated in the House of Commons. The outcome was seen to increase the chances of a softer Brexit or that Brexit itself could be delayed. The pound climbed above $1.32 to its highest against the dollar for more than three months after reports that the Democratic Unionist Party may be willing to support prime minister Theresa May’s Brexit deal.