GLOBAL MARKETS UPDATE - MONDAY 10 OCTOBER 2017

Posted on 09 Oct 2017

Global stockmarkets advanced, but bonds sold-off, in a week that saw Catalonia move further towards independence from Spain.  

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United Kingdom

The FTSE 100 gained 2.0% over the week, helped by a softer tone to sterling.

It was an awful week for Prime Minister Theresa May who faced further cabinet and backbench rebellion over her leadership and a keynote speech where she was plagued by a coughing fit. In addition, Germany and France dashed hopes of fast-tracking talks on a two-year post-Brexit transition deal, insisting the UK’s EU divorce bill be settled first.

The Markit/CIPS purchasing managers' index for the services sector rose to 53.6, up from an 11-month low of 53.2 in August. The same index for the construction sector contracted for the first time in 13 months, falling to 48.1 in September, according to a closely watched survey. Activity in the manufacturing sector also slowed slightly, with the purchasing managers’ index sliding to 55.9, compared to 56.7 in August.

Centrica hit its lowest in more than a decade on fears that it will be forced to cut its dividend following the government’s U-turn on an energy price cap. In contrast, Tesco announced that it is to pay its first dividend in three years following record-breaking losses and allegations of accounting fraud.

US

The S&P 500 rose 1.0% over the week as generally positive economic data helped offset uncertainty over who would get the job as the next chair of the Federal Reserve.

The US economy lost 33,000 jobs in September as employment in the leisure and hospitality sector shrank significantly due to the disruption caused by hurricanes Harvey and Irma. This was the first fall since 2010 and 

was far weaker than the 90,000 gain expected by economists. Data for July and August was also revised down by a total of 38,000. However, the unemployment rate declined to 4.2%, the lowest rate since February 2001, as the storms had “no discernible effect” on the national jobless rate. 

Average hourly earnings rose 0.5% in September, taking the year-on-year increase to 2.9%. The data caused investors to hike expectations for a December rate rise to over 90%.

The Institute for Supply Management’s manufacturing index rose to a 13-year high of 60.8 in September, from 58.8 in August. Meanwhile, the services index jumped to a 12-year high of 59.8 in September, compared to 55.3 in August.

The Trump administration imposed an 80% tariff on Canadian aircraft maker Bombardier, citing complaints from Boeing that the Canadian aircraft company unfairly benefitted from government subsidies. The news comes on top of the decision to impose a 220% duty last month.

Europe

The FTSE Eurofirst 300 inched higher by 0.4% over the week, although Spanish stocks fell 1.9%. Italian stocks also retreated 1.3% on rising uncertainty over the outcome of the country’s elections next year.

Catalonia’s ‘illegal’ independence referendum showed that 90% of the 42% who voted were in favour of independence from Spain. The news caused significant outflows from Spanish equities and caused yields on certain debt issued by the Catalan regional government to increase to the highest level since September last year.

The European Central Bank hinted that it could remain active in the region’s bond markets for longer than many expect, with some policymakers signalling a wish to keep the bank’s quantitative easing programme in operation for most of 2018.

The final reading of the eurozone composite purchasing managers’ index for September came in at 56.7, matching the previous reading, and well above the 55.7 logged in August. Germany, the bloc’s biggest economy, notched the highest PMI reading, with Ireland, France, Spain and Italy also among the highest readings.

German industrial orders jumped 3.6% in August, the biggest rise of 2017, amid signs of solid domestic and foreign demand.

Japan

The Nikkei 225 rallied 1.6% over the week.

Tokyo governor Yuriko Koike, who launched her new Party of Hope the day after Prime Minister Shinzo Abe called a snap election, has questioned the heavy monetary stimulus measures of Abenomics. Instead, she has launched her own “Yurinomics” in which she pledged to tax corporate cash reserves, introduce a basic income guarantee and freeze an increase in consumption tax scheduled for 2019.

The Bank of Japan’s Tankan survey showed business conditions in Japan are at their strongest for a decade. The reading for large manufacturers rose by five points to +22 in September, fuelled by strength in chemicals and machinery, as the effects of a weaker yen feed through to exporters.

Pacific Basin

Chinese stocks listed in Hong Kong hit a two-year high after the People’s Bank of China injected liquidity into the economy by cutting the required reserve ratio for banks.

China’s official purchasing manufacturing index lifted to 52.4 in September, up from 51.7 a month earlier. It was the fastest pace of growth seen since April 2012 and marked the fourteenth-straight month of growth. Meanwhile, the Caixin-Markit purchasing managers’ index showed that manufacturing activity has declined to 51.0 in September, from a six-month high of 51.6 in August.

South Korea’s manufacturing sector expanded for the first time in two months in September, with factory output rising for the first time in more than a year as domestic demand helped mitigate a fall in export orders..

Malaysia’s manufacturing sector slipped back into contraction in September as new orders continued to fall. The Nikkei-Markit Malaysia manufacturing purchasing managers’ index dipped to 49.9 in September from 50.4 in August.

Emerging Markets

Inflation in Brazil continued to ease in September, although by less than had been expected. Consumer prices rose 2.5% in September from a year earlier.

The Reserve Bank of India held its benchmark rate steady at 6%, defying public calls for a rate cut amid a slowdown in the country’s economy due to concerns about a renewed pickup of inflation.

India’s government made changes to its flagship Goods and Service Tax in an attempt to deflect growing criticism ahead of a crunch set of elections. The most notable was dropping the tax charge on taxpayers that buy material from unregistered suppliers - a rule that had threatened the livelihoods of smaller businesses - which had been meant to encourage larger companies either to persuade their suppliers to register for the tax or only buy from already registered suppliers.

Bonds

The yield on the 10-year US Treasury bond rose to 2.40% following signs that wage may be picking up in the US, before closing at 2.36% for a rise of 3bps over the week.

President Trump startled the US municipal bond market by declaring that anyone holding Puerto Rico’s bonds should “say goodbye” to hopes of being repaid. The prices of some general obligation bonds issued by the indebted US territory plummeted by as much as 30% following the president’s comments.

Currencies

The euro came under pressure as participants digested the implications of Sunday’s independence vote in Catalonia.

Sterling weakened as political uncertainty mounted against the backdrop of the Conservative party annual conference and amid further evidence of a gloomy picture of the UK economy.