Global Markets Update Tuesday 27 March 2018

Posted on 27 Mar 2018

Escalating fears of a global trade war knocked stocks over the week.

Global M&A activity has exceeded $1trn so far this year. Notable deals have included US health insurer Cigna’s $67bn takeover of pharmacy benefits manager Express Scripts; German utility Eon’s acquisition of renewable energy group Innogy for €43bn; and Comcast’s £22.1bn bid for Sky.

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United Kingdom

The FTSE 100 lost 3.4% over the week, falling back below the 7,000 level.

The Bank of England left rates on hold but gave strong hint that rates would rise in May.

The UK and EU reached broad agreement on 21-month Brexit transition period to end on 31/12/20, although keys areas such as how to deal with the border between Ireland and Northern Ireland have still to be resolved. The UK can now start to negotiate its own trade agreements, although it cannot implement them until the transition period ends.

Average earnings increased 2.6% in the three months to the end of January, up from 2.5% in the final quarter of 2017 and the fastest pace of growth in more than two years.

Inflation eased. The consumer price index rose 2.7% year-on-year in February, compared to an increase of 3.0% in January.

Retail sales rose 0.8% in February, driven by higher supermarket sales. Toys R Us collapsed into administration, as did Maplin; New Look said it would close 60 stores; Carpetright revealed it was exploring a company voluntary arrangement; Moss Bros delivered a profit warning; Kingfisher reported a 10% fall in annual profits; and Next said it was the toughest trading conditions in 25 years. Meanwhile, in the restaurant sector, Jamie's Italian, burger chain Byron and Prezzo are closing outlets and laying off staff.

US

The S&P 500 shed 4.6% over the week.

The Trump administration announced plans for 25% tariffs on some $60bn of Chinese imports, heightening fears of a trade war between the two countries. However, plans to implement steel and aluminium tariffs on imports from the EU and six other countries (Argentina, Australia, Brazil, Canada, Mexico and South Korea) were “paused”.

HR McMaster was replaced as national security adviser by hardliner John Bolton. The change is the latest in a series of white house changes in which moderate voices have been replaced by more nationalistic ones.

The Federal Reserve raised interest rates by 25bps to a range of 1.50%-1.75% but stuck with its guidance of only two more rises in 2018. However, the dot plot of future rate projections pointed to an extra rate increase in 2019 and further tightening in 2020, as policymakers expected inflation to accelerate.

Facebook lost 10% over the week as founder Mark Zuckerberg apologised for data breaches that affected 50 million users. Other social media companies, such as Twitter and Snap, were also caught up in the sell-off.

Europe

The Eurofirst 300 lost 3.2% over the week to touch its lowest level this year.

The EU proposed measures to impose a “digital tax” of 3% on the EU revenues of tech companies.  

The flash estimate of the IHS Markit eurozone composite purchasing managers’ index fell to 55.3 in March, well below market expectations and down from February’s reading of 57.1. The fall was blamed on cold weather, the strong euro and global political uncertainty.

The Ifo Institute’s measure of the German business climate slipped to 114.7 in March from 115.4 in February and a significant fall from 117.6 recorded in January.

The Zew German economic sentiment index dropped 12.7 points in March from February to 5.1 points.

Japan

The Nikkei 225 tumbled 4.9% over the week, falling to a five-month low as the strength of the yen weighed on sentiment.

Inflation, as measured by the core consumer price index, which strips out fresh food prices but leaves in fuel costs, rose to 1.0% in February. Headline inflation rose 1.5% year-on-year, up from 1.4% in February, while core-core inflation - excluding both fresh food and fuel and energy costs – edged higher to 0.5%, up from 0.4% in January.

The Nikkei-Markit flash manufacturing purchasing manager’s index edged lower to 53.2 in March, down from 54.1 in February and a five-month low.

Pacific Basin

China announced it was planning retaliatory tariffs on $3bn of US imports in response to Trump administration’s move.

The People’s Bank of China hiked its seven-day interest rate, following a similar move by the US Federal Reserve.

Emerging Markets

Brazil’s central bank cut interest rates to a new record low of 6.5%, saying the reduction was driven by the need to stimulate the economy and benign external conditions.

Bonds

The yield on the 10-year US Treasury bond closed the week at 2.83%, having touched a one-month high of 2.94% following the Fed’s more hawkish projections of future rate rises.

The yield on the 10-year German Bund closed the week at 0.52%, close to its lowest level since mid-January.

Currencies

Safe haven currencies, such as the yen and Swiss franc, outperformed - with the latter rising to its highest level versus the US dollar since November 2016.

Commodities

Brent crude regained $70 a barrel as the appointment of hardliner John Bolton as US national security adviser was seen to increase the chances that the nuclear deal with Iran would collapse. Such an eventuality would hit crude exports.