Global Markets Update Monday 10 December 2018

Posted on 10 Dec 2018

Stocks were volatile, initially rising on hopes of a trade truce between the US and China before falling sharply on news of the arrest in Canada of the CFO of Chinese telecoms giant Huawei on allegations that she had violated US sanctions against Iran. Rising concerns over the outlook for global growth also weighed on investors sentiment, with bond yields dropping sharply.

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United Kingdom

The FTSE 100 dropped 2.9% over the week, closing near to its lowest level in two years.

The UK government was forced to publish the full legal advice on Theresa May’s Brexit deal, after it was found in contempt of parliament for not doing so. The government looks almost certain to face a defeat when MPs vote on the deal on Tuesday 11 December.

The IHS Markit/CIPS purchasing managers’ index for the service sector fell to 50.4 in November, the lowest level since July 2016 and down from 52.2 in October. A similar survey for manufacturing rose to 53.1 in November, up from 51.1 in October, due in part to stockpiling ahead of the Brexit deadline in March 2019, while construction rose to 53.4 in November compared to 53.2 the previous month.

GlaxoSmithKline bought US biotech firm Tesaro for $5.1 billion.

BT said it will strip Huawei’s equipment from its core network within two years, after concerns were raised about the Chinese firm’s presence in critical telecoms infrastructure.

US

The S&P 500 fell 3.4% amid concerns over the durability of the trade truce between the US and China and a dimming outlook for the global economy.

At the G20 summit in Argentina, President Donald Trump and Xi Jinping, his Chinese counterpart, agreed to suspend the imposition of any new trade tariffs for 90 days. However, the trade truce appeared short-lived when White House trade adviser Peter Navarro said the US would push ahead and increase tariffs on Chinese imports if Washington and Beijing could not agree a binding trade truce within a 90-day negotiating period. The arrest of a key board member of Huawei added to investors’ unease.

The US economy added a weaker-than-expected 155,000 jobs in November, although the unemployment rate held steady at 3.7%. Average hourly earnings rose 3.1% in the 12 months to November.

The ISM non-manufacturing purchasing managers’ index rose to 60.7 in November, up from 60.3 in October. The ISM manufacturing index rose 59.3 in November, up from 57.7 the previous month.

Europe

The Eurofirst 300 lost 3.4% over the week, with many stocks closing at their lowest level in more than two years.

Annegret Kramp-Karrenbauser, aka AKK, became leader of Germany’s CDU party. She had been Angela Merkel’s choice as her replacement.

France suffered the fourth weekend of its worst street violence in years, as the “yellow vest” movement caused the government to backtrack on planned fuel tax rises and to freeze electricity and gas prices for 2019.

Japan

The Nikkei 225 fell 3.0% over the week.

The Nikkei-Markit services purchasing managers’ index came in at 52.4 in November, close to the six-month high of 52.5 reached in October.

The Nikkei-Markit manufacturing purchasing managers’ index fell to a 15-month low of 52.2 in November compared to 52.9 in October. The data indicates that October’s stronger data was related to a bounce back after the weather-related slowdown in September.

Pacific Basin

Australia’s GDP rose a weaker-than-expected 0.3% in the third quarter. This was the lowest level of growth for two years. Earlier in the week, the Reserve Bank of Australia had kept interest rates at 1.5% - the level at which they have been since August 2016.

China’s Caixin manufacturing purchasing managers’ index edged up to 50.2 in November from 50.1 in October, although export orders fell for the eighth consecutive month, while the services index jumped to 53.8 in November from the 13-month low of 50.8 recorded in October.

The Nikkei Taiwan manufacturing purchasing managers’ index fell to 48.4 in November, indicating the sector is shrinking at the quickest pace in three years amid a worsening outlook for exports.

The South Korea Nikkei-Markit manufacturing purchasing managers’ index dropped to 48.6 in November, falling back into contraction territory after just two months of expansion. Business confidence slipped to a 27-month low.

Emerging Markets

Mexican assets jumped after authorities offered to buy back bonds tied to an airport project that could be scrapped following a referendum. The news helped to alleviate some of the recent jitters over the policies of the country’s new president Andrés Manuel López Obrador.

Brazilian inflation eased to 4.05% in the 12 months to November.

South Africa’s economy emerged from recession in the third quarter, growing at an annualised rate of 2.2%.

Bonds

The yield on the benchmark 10-year US Treasury fell 16bps over the week to close at a three-month low of 2.85%, while the yield on the two-year bond dropped 10bps to close at 2.72%. During the week, the yield gap between the two- and 10-year bonds slipped below 10bps for the first time since mid-2007, while the yields on two- and three-year Treasuries moved above that on the five-year note – an inverted yield curve often indicates an impending economic slowdown.

Italian government bond yields fell to their lowest level since the end of September, and spreads over German Bunds dropped to the narrowest since early October, following reports that the Italian government may compromise with Brussels over its controversial deficit-boosting budget.

Commodities

Oil was volatile, but ended the week on a strong note as Opec agreed to cut output by 1.2 million barrels a day.