Global Markets Update - Monday 3 July 2017

Posted on 03 Jul 2017

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Global bonds and the US dollar fell after more hawkish comments from the European Central Bank, the Bank of England and the Bank of Canada raised speculation that they were soon to join the Federal Reserve in starting to normalise monetary policy. The news also unsettled global stockmarkets.

 

United Kingdom

The FTSE 100 dropped 1.5% over the week, causing it to record its biggest monthly loss since September 2015.

Bank of England governor Mark Carney indicated he may be becoming more upbeat about UK economic prospects, saying some removal of stimulus “may be necessary”. He indicated he would vote to tighten monetary policy if business investment began to rise, offsetting weaker consumption. Only last week Mr Carney said it was “not yet time” to raise rates.

The Bank of England forced UK banks to find a further £11.4bn in the next 18 months in case future economic shocks mean some borrowers cannot keep up their repayments.

US

The S&P 500 slid 0.5% over the week. The index posted the best first half of a year since 2013. Tech and biotechs led the advance, with rises of around 17%, although tech stocks recorded their worst month in a year in June. Healthcare companies have been buoyed by hopes that drug companies will face a more benign environment as Washington looks to replace Obamacare. Energy companies were the largest laggards over the year-to-date period, falling 14%.

US first-quarter GDP growth was revised up to an annualised pace of 1.4%, from the previous estimate of 1.2%, which itself was an increase from the original reading of 0.7%. The upward revision was due to stronger consumer spending.

US banks passed the latest round of stress tests from the Federal Reserve. This opened the door to increased 

shareholder payouts, including buybacks and higher dividends.

The Federal Reserve’s preferred measure of inflation, the core personal consumption expenditures price index, rose at a year-on-year pace of 1.4% in May, down from 1.5% in April. The headline index slid to 1.4% in May, down from 1.7% the previous month.

The Conference Board’s index of US consumer confidence rose to a stronger-than-expected 118.9 in June, up from 117.6 in May. 

The ISM purchasing managers’ index of manufacturing activity in the US Midwest soared to 65.7 in June, well above the expected level of 58.

Durable goods orders fell 1.1% in May, but excluding transport orders the data was 0.1% higher.

Stephen Poloz, governor of the Bank of Canada, indicated that interest rate cuts had done their job and that the Canadian central bank needed to consider its options. The probability of a rise in Canadian rates increased to 69% from 39% following his comments.

Europe

The FTSE Eurofirst 300 lost 2.1% over the week.

Mario Draghi, president of the European Central Bank, said he was growing increasingly confident about the euro-zone recovery and that “deflationary forces have been replaced by reflationary ones”. The comments fuelled speculation that the ECB would soon start to taper its bond-buying programme. Senior figures in the ECB later signalled that markets had “misinterpreted” Mr Draghi’s remarks 

Headline eurozone inflation fell to 1.3% in June, from 1.4% in May, due to declining energy prices. However, core inflation rose from 0.9% to 1.1%.

The Ifo index of Germany’s business climate index rose to a fresh record high of 115.1 in June, up from 114.6 in May.

The Italian government set aside €17 billion to wind down two failed Veneto banks. The cash will cover losses from the bank’s bad loans; their good assets will be handed to Intesa Sanpaolo, the country’s strongest lender.

Japan

The Nikkei 225 slipped 0.5% over the week.

In contrast to more hawkish comments from central banks in the west, comments from a Bank of Japan board member Harada underscored the need to maintain policy accommodation.

Japan’s industrial production fell 3.3% in May, reversing April’s positive number.

Japan’s core consumer price index rose 0.4% year-on-year in May, up from 0.3% in April. Headline consumer prices held steady at 0.4% year-on-year in May.

Pacific Basin

Small cap stocks in Hong Kong suffered a substantial, but unexplained, crash that wiped out $6 billion in market capitalisation. Prices of 13 companies fell by more than 50%, with the worst performers losing some 94%. The companies affected were all part of a group subject to tangled cross-holdings, and ranged from an umbrella maker to building contractors.

China’s official manufacturing purchasing managers’ index rose to 51.7 in June, up from May’s level of 51.2. The official non-manufacturing purchasing managers’ index for June edged up to 54.9, from 54.5 in May.

Emerging Markets

Brazil’s President Temer faced calls for his resignation after prosecutors filed a criminal indictment against him for corruption.

India faces disruption as it  introduces its goods and service tax on 1 July. The tax replaces a complex system of regional levies with just one.

Bonds

European bond yields rose significantly over the week. The yield on the 10-year German Bund rose 21bps to 0.47%, while the yield on the 10-year UK Gilt rose 22bps to 1.26%.

The increase in European yields also drove US yields higher, with the yield on the 10-year Treasury bond closing the week 14bps higher at 2.28%. Meanwhile, the yield on the two-year note rose to 1.37%, a rise of just 3bps over the five days.

Currencies

The US dollar weakened and the euro, British pound and Canadian dollar strengthened after more hawkish comments from the European, UK and Canadian central banks.

Commodities

Oil prices rose modestly, with Brent Crude reaching almost $48 a barrel. However, oil prices have suffered their worst start to the year since 1998, falling 15.5% in total.