Global Markets Update Tuesday 18 December 2018

Posted on 18 Dec 2018

Global equities were heartened by news that China will cut their tariff on imported cars from 40% to 15%, but rising concerns over the outlook for global growth following weak data from the eurozone and China weighed on markets as the week progressed.

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United Kingdom

The FTSE 100 rose 1.0% over the week.

Theresa May delayed the House of Commons vote on her Brexit deal until January since she failed to garner sufficient support. After a day of meeting European leaders to try to salvage the deal, the Prime Minister faced a vote of no confidence from the Conservative Party. She won the vote – although 117 of 317 Tory MPs voted against her – and vowed to fight on. Meanwhile, Brussels warned that there was “no room whatsoever” to renegotiate on Brexit.

The UK economy grew by 0.4% in the three months to October, slower than the 0.6% rate of growth recorded in the three months to September. The softening was mainly due to slower car sales.

Average weekly wages excluding bonuses were up by 3.3% for the three months to October compared to the same period the previous year. This is the biggest rise since November 2008.

US

The S&P 500 lost 1.6% over the week, closing at its lowest level since early April. The financial sector ended the week in a bear market amid mounting concerns for economic growth: Goldman Sachs, Citigroup, Morgan Stanley and Wells Fargo have all seen falls of at least 20% from their January peak. Small cap stocks, as measured by the Russell 2000, also neared a bear market.

President Trump threatened a government shutdown if Democrats failed to agree to raise the funding limit to finance a border wall with Mexico.

The final FOMC meeting of the year takes place on Wednesday 19 December. While the Fed is widely expected to raise rates a further 25bps, many commentators are expecting it to take a more dovish tone on the outlook for rate rises in 2019 and beyond.

Headline consumer price inflation eased to an annual increase of 2.2% in November, down from 2.5% in October and the lowest level in nine months. However, core inflation, which strips out food and energy, edged up to 2.2% year-on-year in November, compared to 2.1% the previous month.

Headline retail sales rose only 0.2% in November, as lower petrol prices depressed spending on fuel, but core sales jumped 0.9%, the fastest pace of growth since November 2017.

Europe

The Eurofirst 300 gained 0.7% over the week.

The European Central Bank confirmed it would end its asset purchases by the end of the year, but ECB President Mario Draghi indicated that he saw the balance of risks to the economy moving to the downside.

The flash estimate of the eurozone composite purchasing managers’ index tumbled to 51.3 in December from 52.7 in November, its lowest level in four years.

Eurozone investor sentiment, as measured by Sentix, dropped to the lowest level in four years in December as concerns of an impending global economic downturn grow.

The flash estimate of France’s composite purchasing managers’ index plunged to 49.3 in December, down

from 54.2 in November and the lowest level since February 2016. The data indicates that the “yellow vest” unrest has tipped economic activity into contraction.

The Zew indicator of German economic sentiment rose to a better-than-expected reading of minus 17.5 in December. However, the indicator of current conditions dropped to 45.3 points from 58.2 in November, the lowest level since January 2015.

Germany’s composite purchasing managers’ index came in slightly below expectations at 52.2 in December, with new business levels that “edged closer to stagnation.”

Japan

The Nikkei 225 dropped 1.4% over the week.

Japan’s economy shrank 2.5% on an annualised basis in the third quarter, down from an initial estimate of a 1.2% contraction and the sharpest contraction since the second quarter of 2014. The revision suggests that a series of natural disasters had an even greater impact on Japan’s economy than previously thought.

The government unveiled a series of tax breaks for housing and cars that it hopes will avoid tipping the economy into recession when the country raises consumption tax from 8% to 10% next autumn.

Pacific Basin

Chinese industrial output expanded 5.4% year-on-year in November, the slowest pace in more than 15 years, adding to fears of a deepening slowdown. Retail sales also rose by less than expected, increasing 8.1%, but fixed asset investment rose slightly more than expected in the first 11 months of the year.  

Thailand’s Election Commission set a date of 24 February 2019 for the next general election. This follows four years under military rule.

Emerging Markets

India’s finance minister resigned amid disagreements with Prime Minister Narendra Modi over the Reserve Bank of India’s independence and the direction of India’s financial sector. Tensions between the RBI and Mr Modi have been rising for months over the central bank’s hawkish monetary policy, use of its mounting reserves and the tough measures taken to clean up bad loans at India’s state-run banks. In further bad news, the ruling Bharatiya Janata party suffered surprise losses in state elections.

Turkey’s economic growth slowed to an annual 1.6% in the third quarter, its slowest pace since 2016 following the attempted military coup.

Russia’s central bank raised the key interest rate by 25bps to 7.75%, citing short-term inflationary risks and the threat of US sanctions.

In its first budget, Mexico’s new left-wing government vowed “absolute commitment to fiscal and financial discipline” and a primary surplus of 1% of GDP next year without any new taxes. The move was seen as an attempt to settle investors who had been unnerved by several policy initiatives from AMLO’s new government.

Bonds

The yield on the 10-year US Treasury bond closed the week at 2.88%.

The yield difference between French and German government bonds has widened to the highest levels since the uncertain days of the early rounds of the presidential election in 2017. This follows the news that Emmanuel Macron was forced to announce new spending measures that will increase the country’s budget deficit to 3.5% of GDP - beyond the EU cap of 3%.

In contrast, the yield on the 10-year German Bund fell to 0.25%, its lowest level since the summer of 2017, with German inflation expectations for the next decade languishing at 18-month lows of around 1.1%.

The yield on the 10-year Italian BTP fell to a two-and-a-half-month low of 2.97% following a news report that the country’s government was preparing to give in to EU demands that it lower its deficit target for next year.

The yield on the benchmark 10-year gilt dropped as low as 1.11%.