Global Markets Update Monday 7 January 2019

Posted on 21 Jan 2019

After the worst year for US, UK and European stockmarkets since 2008, weak Chinese manufacturing data caused global stocks to start 2019 in a nervous frame of mind while global government bonds rallied sharply. 

However, stocks recovered towards the end of the week as risk appetite was bolstered by optimism on US-China trade relations, stronger-than-expected US jobs data and soothing comments from Federal Reserve chair Jay Powell.

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United Kingdom

The FTSE 100 rose 1.5% over the week.

The IHS Markit manufacturing purchasing managers’ index was a stronger-than-expected at 54.2 in December, its highest level for six months and up from 53.1 in November. The upswing in the index was due to stockpiling ahead of Britain’s exit from the EU rather than a more permanent improvement in economic activity.

The IHS Markit services purchasing managers’ index inched higher to 51.2 in December, up only slightly from the 28-month low registered in November. Meanwhile the construction PMI came in at 52.8 in December, up from 53.4 in November.

Taken together, the figures suggest the UK economy grew just 0.1% in the final quarter of the year as Brexit draws near.

The British Chambers of Commerce warned that UK firms are being squeezed by labour shortages, rising prices and a slowdown in sales. It warned that higher costs meant more manufacturers were expecting to raise prices.

Strong Christmas Eve trading helped the John Lewis Partnership post an 11% rise in sales in the last week of 2018 compared with a year earlier. Next also reported a sharp rise in online sales over the Christmas period, although trading at its stores declined.

US

The S&P 500 gained 1.0% over the week.

Fed chair Jay Powell reassured markets saying that, while US economic momentum was solid, the central bank was sensitive to the messages being sent by markets and would be patient on monetary policy in 2019. He also emphasised that there was no pre-set path for interest rate rises, and that the Fed “wouldn’t hesitate” to change its balance sheet policy if needed.

The US government shutdown dragged into its third week as President Trump continued to battle Democrats over funding for the wall with Mexico. In addition, Department of Defence chief of staff Kevin Sweeney became the third senior Pentagon official to announce his resignation since President Trump's announcement that the US would withdraw troops from Syria.

The US economy added 312,000 jobs in December, well ahead of predictions of 177,000. The unemployment rate nudged higher to 3.9%, while average hourly earnings increased at an annual rate of 3.2%, a pick up from the rate of 3.1% recorded in November and the fastest pace of growth since 2009.

The ISM manufacturing index fell to 54.1 in December, down sharply from November’s reading of 59.3 and the weakest level since November 2016. The survey also showed that businesses were becoming increasingly worried about the impact of Washington’s trade dispute with Beijing.

Apple’s share price slumped after it cut its revenue forecasts for the first time in 16 years, blaming poor iPhone sales in China. The news also hit Apple suppliers across the globe.

Shares in Tesla also tumbled as sales figures disappointed and a price cut depressed the outlook for profits.

Bristol-Myers Squibb agreed to buy Celgene for $90 billion. The tie up will create a world leader in oncology.

Europe

The Eurofirst 300 rallied 2.2% over the week.

Headline eurozone inflation eased to an eight-month low of a 1.6% increase on a year-on-year basis in December, down from the 1.9% increase recorded in November. Core inflation was unchanged at 1.0%.

The final reading of the IHS Markit eurozone composite purchasing managers' index fell to 51.1 in December, compared to the flash estimate of 51.3.

France suffered another weekend of “yellow vest” protests. In his new year address to the nation, President Macron struck a defiant tone, saying the government would push on with its reform programme, and would "make no allowances in guaranteeing public order."

Japan

The Nikkei 225 fell 2.3% over the week, having closed 2018 with the first annual loss in seven years.

Pacific Basin

Chinese stocks lost about a quarter of their value over 2018, while Hong Kong stocks ended 2018 with their worst annual loss since 2011.

China’s official manufacturing purchasing managers' index dropped to 49.4 in December. down from 50.0 in November and the lowest reading since February 2016. The Caixin-Markit manufacturing purchasing managers’ index slipped to 49.7, down from 50.2 in November and its lowest level since May 2017. However, news from the services sector was brighter with the Caixin-Markit services purchasing managers’ index rising to a six-month high of 53.9 in December, compared to 53.8 in November. In response, the People’s Bank of China announced a 100 basis point cut to the required reserve ratio for banks in a bid to support the economy.

The Taiwan Nikkei-Markit purchasing mangers’ index fell to 47.7 in December, from 48.4 in the previous month. This was the third consecutive month of falling activity with companies reporting subdued demand amid US-China trade tensions.

South Korean exports fell 1.2% in December compared to a year earlier. The country is a leading exporter of microchips and is the latest sign that a slowdown in China and the US/China trade war is hitting other regional economies.

Emerging Markets

Brazilian equities rose to a new record high, boosted by new president Jair Bolsonaro’s promise of economic revival.

Turkish inflation slipped to 20.3% in December, down from 21.62% in November, and raising the prospect that the central bank may cut interest rates ahead of a local-election campaign.

Bonds

US Treasury yields plunged over the week, with the yield on the 10-year bond falling as low as 2.56%, the lowest level since mid-January 2018, before closing the week at 2.67%. The two-year Treasury yield fell below the Fed funds’ effective rate for the first time in more than a decade, before closing the week at 2.50%.

The 10-year German Bund yield closed the week at 0.2%, having fallen as low as 0.15% - the lowest level since April 2017.

The yield on 10-year Japanese government bond fell to a two-year low of -0.06%.

US high-yield bond fund outflows exceeded $60 billion in 2018, according to EPFR Global, double the amount withdrawn in 2017. It was also double the amount withdrawn in 2014, another period when oil prices fell sharply.

Currencies

The Japanese yen surged over the week, buoyed by its status as a safe haven. In contrast, the Australian dollar, which is viewed as a proxy for the Chinese economy, slumped to its lowest level in a decade.