Global Markets Update Monday 6 August 2018

Posted on 06 Aug 2018

Investors remained jittery after trade tensions escalated. China said it will impose new tariffs on $60 billion of US imports, including aircraft and liquefied natural gas, in response to Donald Trump’s threat to raise the rate of threatened tariffs on $200 billion worth of Chinese exports to 25%, up from an original proposal of 10%.

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United Kingdom

The FTSE 100 dropped 0.5% over the week.

The Bank of England raised rates by 25 basis points to 0.75% - its second such increase since the global financial crisis. Governor Mark Carney warned that the risk of a no-deal Brexit was “uncomfortably high”.

The IHS Markit manufacturing purchasing managers’ index fell to 54.0 in July, its lowest level in three months. Service sector activity also fell to a three-month low of 53.5, down from 55.1 in June.

UK consumer confidence, as measured by GfK, fell one point to minus 10 in July, its lowest since February.

Royal Bank of Scotland is to pay its first dividend in 10 years.

US

The S&P 500 closed the week unchanged.

As widely expected, the US Federal Reserve kept rates on hold but provided a bullish assessment of the economy following its latest two-day meeting, describing a range of economic indicators as “strong.

Non-farm payrolls rose by a lower-than-expected 157,000 in July, although data for May and June were revised up to 268,000 and 248,000 respectively. The unemployment rate slipped to 3.9%.

Average earnings growth held steady, rising at a year-on-year rate of 2.7% in July.

The ISM manufacturing purchasing managers’ index slipped to 58.1 in July, down from 60.2 in June. The ISM non-manufacturing index fell to 55.7 in July, down from 59.1 in June.

Apple became the first company to hit a market capitalisation of $1 trillion, following strong second-quarter results and share buy-backs. While the company is selling fewer iPhones, it is making more money per device and is also capitalising on selling apps, cloud storage and music streaming.

Europe

The Eurofirst 300 lost 0.8% over the week.

The eurozone economy expanded by a lower-than-expected 0.3% in the second quarter, the weakest growth rate since the second quarter of 2016. In contrast, Sweden’s economy grew 1.0% over the second quarter.

The Ifo index of overall eurozone business sentiment fell to 19.6, down from 31.1, while the index for expectations slid below zero for the first time since 2012.

Eurozone industrial prices rose 3.6% in June compared to the same month in the previous year, reflecting higher energy costs.

The IHS Markit’s Spain services purchasing managers’ index dropped to 52.6 in July, down from 55.4 in June and its lowest level since November 2013, amid heightened political uncertainty.

Italy’s services purchasing managers’ index for July also weakened, with new orders rising at their slowest rate since October 2016. Italian political tensions also rose as the new coalition government clashed with its finance minister regarding spending and budgets.

Japan

The Nikkei 225 dropped 0.8% over the week.

The Bank of Japan defied expectations that it was to stop its stimulus measures, pledging to maintain extremely low rates. It did however alter the target for the 10-year government bond yields to +/- 20 basis points of zero. Previously, the level at been set at +/- 10bps. The news caused yields on Japanese government bonds to rise to above 0.1%.

Japanese industrial production dropped 2.1% over the month of June.

Pacific Basin

In China, the official manufacturing purchasing managers’ index slid to 51.2 in July, down from 51.5 in June. The Caixin-Markit manufacturing purchasing managers’ index also fell to 50.8 in July, down from 51, while the equivalent services purchasing managers’ index fell to 52.8, down from 53.9 in June, with business confidence falling to a near-record low amid the US-China trade war.China’s home sales also suffered a broad-based decline in July.

The Nikkei-Markit South Korea manufacturing purchasing managers’ index fell to 48.3 in July from 49.8 in June. This marks the fifth consecutive month that the reading has declined.

The Nikkei-Markit Taiwan manufacturing purchasing managers’ index came in at 53.1 in July, its lowest since May 2017, but up from 54.5 in June.

Emerging Markets

Turkish inflation rose to 15.85% in July. The outcome was lower than many analysts had forecasted, with many predicting inflation would rise to above 16%.

The Czech National Bank said that it would increase its key interest rate, the two-week repo rate, by 25 basis points to 1.25%. This is the fifth time this year that the central bank has raised rates as rapid growth leads to surging wages.

The Reserve Bank of India raised interest rates by 25 basis points to 6.5%, its second increase in two months as it tackles rising inflationary pressures. The central said that a factor behind its decision was the increase in the “minimum support prices” guaranteed to farmers by the government, which “will have a direct impact on food inflation and second-round effects on headline inflation”. Elsewhere, the Nikkei-Markit India manufacturing purchasing managers’ index dropped to 52.3 in July, from 53.1 in June.

Bonds

The yield on the 10-year US Treasury bond briefly rose back above 3.0% for the first time since June, before closing the week at 2.95%.

The yield on the 10-year German Bund yield rose to almost 0.5%, but Italian bond yields sold off sharply, with two-year yields rising back above 1.36% before closing back below 1.0%, while the yield on 10-year paper rose as high as 3.10% before closing nearer 2.9%.

The yield on the benchmark 10-year Japanese government bond suffered its biggest jump in two years, reaching an 18-month high of 0.145%, after the Bank of Japan widened the target yield level for the benchmark bond.

Commodities

Concerns about the outlook for Chinese growth helped drag copper and other base metals down sharply.

Currencies

The Turkish lira fell to a record low after the US imposed asset freezes on Abdulhamit Gul, Turkey’s justice minister, and Suleyman Soylu, interior minister, for their alleged roles in the detention of Andrew Brunson, an American pastor. In response, President Erdogan said the country is facing an “economic war” and urged citizens to cash in gold and holdings of US dollars and euros to support the currency. He also announced an economic action plan in which Turkey will issue a renminbi bond and borrow from China. The plan includes 400 new infrastructure and other showpiece projects, with a value of about $9 billion.