Global Markets Update Monday 31st December 2018

Posted on 02 Jan 2019

Global equities fell sharply, with US stocks leading the retreat amid fears of a US government shutdown pushed volatility to its highest level since February. Both US and global equities are on course for their worst year in a decade.

US stocks, in particular, tumbled on Christmas Eve amid concerns that President Trump was considering sacking Fed chair Jay Powell, but recovered these losses on Boxing Day when major benchmarks posted their largest one-day rise in almost 10 years amid White House assurances that the Fed chair's job was safe.

United Kingdom
The FTSE 100 slipped 1.6% over the fortnight.
The Bank of England kept interest rates on hold but cut its growth forecast for UK first-quarter 2019 GDP growth to 0.2% as it warned a lack of Brexit clarity is hitting the economy.
UK inflation fell slightly to a 20-month low of 2.3% in November, down from 2.4% the previous month, driven mainly by a big fall in petrol prices.
Despite a series of dismal stories from UK retailers, retail sales jumped by a stronger-than-expected 1.4% in November, helped by Black Friday promotions and stronger growth in sales of household goods. However, HMV was the first high street casualty post-Christmas when it called in administrators on 27 December. 

US
The S&P 500 fell 4.3% over the two weeks. The decline put the S&P 500 on course for its largest fourth-quarter drop since 2008.


US federal services partially shutdown after President Trump refused to fund the US government unless he was granted the money for a Mexico border wall.


As widely expected, the Federal Reserve raised interest rates by a further 25bps, taking them to a range of 2.25%-2.5%. However, it forecast only two (versus their previous forecast of three) rate increases for 2019 and lowered both its growth and inflation forecasts as it signaled that economic growth could run out of steam. Fed chair Jay Powell’s comments in the post-meeting press conference were also not as dovish as some observers had apparently expected. Moreover, he said the reduction of the Fed’s balance sheet would remain on “automatic pilot”.


US third-quarter GDP growth was revised down to 3.4% on an annualised basis, compared to a previous estimate of 3.5%.


The core personal consumption expenditures price index (PCE), the Fed’s preferred measure of inflation, rose 1.9% in November compared to a year earlier and up from the eight-month low of 1.8% recorded in October.


The New York Fed’s Empire State business index tumbled to its lowest level for 19 months in December, while confidence among US homebuilders deteriorated in December to its worst since 2015.


Data from MasterCard showed US holiday retail sales were up 5.1%, the strongest growth in six years.


Apple, which was one of two companies (the other was Amazon) to reach a market capitalisation of $1 trillion in the third quarter is now down more than 7% over the year to date, taking its market cap to $740 billion. Meanwhile, Microsoft, buoyed by its cloud services, has risen 18% so far in 2018. It is now worth $777 billion.  

Europe
The Eurofirst 300 declined 3.3% over the two-week period.


European banks’ shares have had their worst year since the height of the eurozone crisis, with the sector falling 25%, as investors lost faith in the region’s lenders amid enduring low profitability, outdated business models, negative rates and Brexit.


Italy agreed a deal on its budget with the European Commission. Under the deal, Italy has agreed to lower its planned budget deficit from 2.4% to 2.04% - not so much of a reduction as European officials had hoped for. The deal ended months of uncertainty and meant Italy would avoid a so-called excessive deficit procedure.


The Ifo Institute’s index of the German business climate fell for the fourth consecutive month, reaching a two-year low of 101 in December.


The Swedish Riksbank raised its main interest rate for the first time since 2011, prompting the krone to rally against the euro.

Japan
The Nikkei 225 plunged 6.4% over the two weeks, entering a bear market as it reached the lowest level since April 2017. The index ended the year down 12%. 


Japanese exports grew just 0.1% year on year in November, slowing from an 8.2% rise in October. 


Japanese factory output dipped in November, the sixth such contraction in eight months.

Pacific Basin
The Shanghai Composite lost almost 25% over the year. The Chinese authorities pledged to accelerate fiscal stimulus, saying the world was facing changes “not seen for 100 years”.


Australian equities declined to a two-year low.

Emerging Markets
Mexico’s central bank raised rates by 25bps to 8.25%, following a similar move by the US Fed.
 
Bonds
The yield on the 10-year US Treasury bond hit 2.71%, the lowest level since February.


The difference between two- and 10-year Treasury yields sank back below 10bps for only the second time this year, taking the measure to its lowest level since June 2007.


Investors pulled $4 billion from funds invested in US junk bonds for the week to December 26, the seventh straight week of withdrawals and the largest weekly outflow since the beginning of October.


US junk bonds and loans are on course for their worst month since August 2011. The credit premium on high-yield bonds has jumped by 1.1% since the start of December, the biggest rise in more than seven years, while the yield on the junk bond market has moved above 8%. The volatile market conditions have kept US companies from issuing any high-yield bonds in December. 
The yield on the 10-year German Bund fell at 0.24%.

 

Commodities
Brent crude slumped to a one-year low of below $55 a barrel.


Gold rallied to a six-month high of over $1,260 an ounce as investors sought safe havens.