Global Markets Update Monday, 4 December 2017

Posted on 04 Dec 2017

As purchasing managers’ indices for November picked up significantly, the International Monetary Fund said the world economy is enjoying the broadest and most rapid period of growth since the start of the decade, driven by strong growth in global trade.

 

United Kingdom

The FTSE 100 fell 1.1% over the two-week period as a stronger sterling weighed on the overseas earnings of multinationals.

The UK bowed to EU demands that it honour its financial obligations, removing one of the major obstacles preventing the Brexit negotiations from moving onto transition arrangements. However, the border with Northern Ireland remained a key sticking point.

Philip Hammond’s budget was overshadowed by growth downgrades. The Office for Budget Responsibility revised down its expectations of UK growth in 2017 to 1.5%, from a previous estimate of 2%. It expects growth to drop to 1.3% by 2020 and then rise to 1.5% in 2021. The lower growth means that by 2021-22 government tax receipts will be £20 billion lower than the OBR's March forecast.  Following the budget, the Institute for Fiscal Studies noted that average UK earnings in 2022 could still be less than in 2008.

UK third-quarter GDP was confirmed as expanding by 0.4%. While growth in the services sector slowed to its weakest pace in more than four years, a rebound in consumer spending helped to prop up the overall rate of economic expansion.

The IHS/Markit manufacturing purchasing managers’ index rose to 58.2 in November, its fastest pace in more than four years, due in part to a strong exports.

Banks were boosted by results of the Bank of England’s stress tests which showed they could withstand a ‘severely disruptive’ Brexit.

Thames Water suspended its dividend, while Centrica suffered its worst single-day stock market loss after issuing a profit warning because of problems in its North American business and the loss of UK customers.

US

The S&P 500 rose 2.2% over the two-week period, pushing further into record territory. The small cap Russell 2000 index also rose to a record high, boosted by hopes of tax reform which are expected to benefit domestic businesses the most.

Financial stocks were boosted by hopes that the period of tightening financial regulation was drawing to a close. Retail stocks also rallied amid signs the holiday shopping season had got off to a strong start. Tech stocks experienced a sharp sell-off as investors, who had turned to the sector for earnings growth, rotated into other sectors which are expected to benefit more from tax reforms.

The Senate passed a historic bill to overhaul the US tax code for the first time in a generation. This marks Donald Trump’s first legislative victory as president.

Michael Flynn, a former member of the Trump administration, admitted lying to the FBI about contact with Russia.

US third-quarter GDP growth was revised up to an annualised rate of 3.3%, up from an initial estimate of 3.2% and the strongest rate since the third quarter of 2014. This places the US on course to expand at the fastest pace this year than at any time since 2005.

The Fed’s preferred measure of inflation, the core Personal Consumption Expenditure (PCE) price index, rose 0.2% in October or 1.4% on a year-on-year basis. The headline PCE index slipped to 1.6% on a year-on-year basis, compared to a rate of 1.7% in September.

Incoming Fed chair Jay Powell set the stage for further rate increases and commented that existing rules on banks were tough enough to ensure a stable system. He also said that he expects the Fed’s balance sheet to shrink to around $2.5 trillion to $3 trillion over the course of the next three to four years – it currently stands at around $4.5 trillion.

Europe

The FTSE Eurofirst 300 lost 0.1% over the fortnight.

Angela Merkel failed to establish a coalition government, causing political deadlock in Berlin and raising the prospect of new elections in Germany.

Despite the strength in the euro, the eurozone composite PMI rose from 56 to 57.5, a six and a half year high, in November, boosted by strong export demand, while job growth reached a 17-year high.

The Ifo index of German business sentiment rose to 117.5 in November from 116.8 in October and setting a fresh record high for the fifth time this year.

Lending to business across the eurozone increased by 2.9% in the 12 months to October and the fastest rate of growth since June 2009.

Headline inflation in the eurozone rose to 1.5% in November, up from 1.4 per cent in October, while core inflation held steady at 0.9% per cent. Yet German inflation rose 1.8% in the 12 months to November, a sharp jump from the 1.5% rise recorded in October.

The European Commission’s economic sentiment index rose to its highest level since October 2000 in November as political tensions in Spain and Germany failing to dent the positive mood.

Eurozone unemployment fell to 8.8% in October, the lowest level since the beginning of 2009.

Japan

The Nikkei 225 rallied 1.9% over the two weeks.

The Nikkei-Market Japan manufacturing purchasing managers’ index rose to 53.8 in November from 52.8 in October. Strong overseas demand boosted new orders to their highest rise in 44 months.

Pacific Basin

China’s blue-chip index suffered its worst one-day fall in 17 months, as investors took profits following rising bond yields and measures to reign in excessive debt.

China’s official manufacturing purchasing managers’ index rose to 51.8 in November, up from 51.6 in October. However, the Caixin-Markit manufacturing purchasing managers’ index dipped to 50.8 in November, down from 51 in October.

In South Korea, the Nikkei-Markit manufacturing purchasing managers’ index rose to 51.2 in November, its highest level in four and a half years. The Bank of Korea raised interest rates by 25bps to 1.5%, its first rate rise in more than six years.

Singapore’s economy grew at a faster-than-forecast rate of 5.2% in the three months to the end of September as the country’s manufacturing sector recorded strong growth.

The Taiwan Nikkei-Markit manufacturing purchasing managers’ index came in at 56.3 in November, up from the three-month low of 53.6 reported in October.

Thailand’s economy grew at its fastest pace in more than four years, growing 4.3% in the third quarter as private consumption, government investment and exports rose.

Emerging Markets

Mexico’s central bank lowered its 2017 growth forecast to 1.8-2.3%, down from the previous estimate of 2-2.5%, as a result of the devastating earthquakes and hurricanes that lashed the country in the third quarter.

Brazil’s economy expanded 0.1% over the third quarter, taking the year-on-year growth rate to 1.4%.

India received its first credit rating upgrade in 14 years from Moody’s. India’s economy expanded 6.3% in the third quarter, reversing more than a year of slowing growth, helped by a strong performance from the manufacturing sector.

Bonds

The yield difference between two and 30-year US Treasury bonds slipped below 1% for the first time since November 2007. Historically, such a flattening of the yield curve has predicted that the US economy is heading towards a setback.

The yield on 10-year Chinese government bonds rose above 4%, continuing a bond rout that has gathered pace over most of this year.

Commodities

Opec and countries outside the cartel, such as Russia, agreed to extend oil production cuts into 2018.