Global Markets Update Monday 05 March 2018

Posted on 05 Mar 2018

Global stockmarkets took another turn down, as fears of a trade war were heightened following Donald Trump’s plan to impose hefty tariffs on steel and aluminium imports. Hawkish comments from new Fed chair Jay Powell also undermined sentiment.

Global Market Update

United Kingdom

The FTSE 100 slid 1.1% over the week.

Theresa May acknowledged that both the UK and the EU will need to make compromises in the forthcoming Brexit negotiations, saying that it would not be possible for everyone to get all they wanted. While the speech appeared to satisfy both ardent Brexiteers and pro-EU factions within the Conservative Party, it received a less favourable response from the EU.

The IHS Markit/CIPS manufacturing purchasing managers’ index slipped to an eight-month low of 55.2 in February compared to 55.3 in January.

The previous chancellor George Osborne’s deficit reduction target has been finally achieved, two years later than planned.

US

The S&P 500 slipped 0.9% over the week.

In his first congressional testimony, the new Fed chair Jay Powell gave a bullish assessment of the US economic outlook, triggering speculation that he could be more aggressive in raising interest rates, despite the recent market volatility. Mr Powell said that his outlook on the US economy had strengthened this year and that he saw inflation moving towards the Fed’s 2% target. However, he stopped short of saying that investors should expect a larger number of rate rises in 2018, In his later Humphrey-Hawkins testimony, Mr Powell emphasised that interest rate increases will be gradual.

The Fed’s preferred measure of inflation, the core PCE index, registered a rise of 1.5% on a year-on-year basis in January.

The ISM manufacturing purchasing managers’ index rallied to 60.8 in February, the highest level since May 2004.

The Conference Board’s consumer confidence index reached its highest level since 2000 in February.

US GDP growth for the final quarter of 2017 was revised down to an annualised rate of 2.5%, compared to an initial estimate of 2.6%.

Donald Trump announced that he would next week sign an order to impose global tariffs of 25% on steel and 10% on aluminium, prompting warnings of retaliatory action from the EU, China, Japan and Mexico.

Europe

The MSCI Europe lost 1.3% over the week.

Headline eurozone inflation slipped to 1.2% in February on a year-on-year basis, down from 1.3% in January and the weakest level since December 2016. Core inflation held steady at 1%.

The European Commission’s economic sentiment index eased to 114.1 in February, but remained at “historically elevated” levels, particularly among service providers.

The eurozone manufacturing purchasing managers’ index fell to 58.6 in February, from 59.6 the previous month, as bottlenecks constrained activity.

German retail sales dropped 0.7% in January, well below forecasts of a 0.9% rise.

Norway cut its inflation target by 0.5% to 2%, as its spending from oil revenues declines, reducing inflationary pressures.

Japan

The Nikkei 225 declined 3.3% over the week.

The governor of the Bank of Japan suggested the central bank could start to move away from its ultra-loose monetary policy as early as next year, leading to a strengthening in the yen.

Japan’s Nikkei-Markit manufacturing purchasing manager’s index came in at 54.1 in February, down from 54.8 in January.

Japanese industrial production fell by a greater-than-expected 6.6% over the month of January and compared to a 2.9% increase in December. Transport equipment and general-purpose, production and business-oriented machinery contributed to the decrease.

Japan’s unemployment rate fell to 2.4% in January, its lowest level in almost 25 years.

Pacific Basin

China’s official manufacturing purchasing managers’ index fell to 50.3 in February. This was the largest monthly drop since 2011 and took the index to its lowest point since August 2016. The sharp slowdown was primarily attributed to the timing of the lunar new year holidays. However, the Caixin-Markit purchasing managers’ index, which focuses on smaller and private businesses, edged up to 51.6 in February from 51.5 in January.

Malaysia’s Nikkei-Markit manufacturing purchasing managers’ index fell to 49.9 in February from 50.5 in January, Taiwan’s manufacturing purchasing managers’ index slipped to 56 in February, down from 56.9 in January. However, Indonesia’s manufacturing purchasing managers’ index rose to a 20-month high of 51.4 in February from 49.9 in January.

Emerging Markets

The Indian economy grew at an annual rate of 7.2% in the final quarter of 2017, driven by a pick up in manufacturing and public spending. The news will provide a boost to Prime Minister Modi who faces a general election in just over a year.

Brazil’s GDP increased 0.1% over the fourth quarter of 2017. The economy increased by every quarter in 2017, taking its expansion compared to the same period in 2016 to 2.1%, helped by an improving agriculture sector.

Bonds

The yield on the 10-year US Treasury bond closed the week at 2.85%, while the yield on the 10-year German Bund closed at 0.64%.

Currencies

The US dollar rallied on Jay Powell’s hawkish tone in his testimony to Congress, moving further away from February’s three-year lows. The Japanese yen also rallied after BoJ governor Kuroda indicated that the central bank could start to end its ultra-low monetary policy as soon as next year.