Global Markets Update Monday 11 June 2018

Posted on 11 Jun 2018

The G7 summit in Canada ended in acrimony over tariffs, with Donald Trump leaving early to attend a meeting with North Korean leader Kim Jong Un in Singapore. The summit highlighted the rift between the US president and its key partners.

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United Kingdom

The FTSE 100 eased 0.3% over the week.

Theresa May clashed with her Brexit-focused ministers over the backstop plan for the Irish border.

The UK services purchasing managers’ index rose to 54 in May, up from 52.8 in April and the highest level since February. This follows a recovery in the manufacturing and construction sectors, taking the ‘composite’ index to the highest level this year. The news was seen to vindicate the Bank of England’s view that the first quarter slowdown was an aberration, due mostly to the blast of cold weather brought by the “Beast from the East”.

Retail sales jumped to a four-year high of 4.1% in May compared to a year earlier, helped by warmer weather, bank holidays and the royal wedding. A separate report from Barclaycard echoed these findings, signalling that consumer spending in May was up 5.1% from a year earlier - the highest rate since April 2017.

The pain on the UK high street continued with House of Fraser announcing it would close 31 stores and Poundworld filed a notice of intention to appoint administrators, giving it 10 days to find a buyer.

US

The S&P 500 rose 1.4% over the week.

The ISM non-manufacturing purchasing managers' index to a stronger-than-forecast 58.6 in May, compared to a dip to 56.8 in April.

The Trump administration has reached a deal with China’s ZTE in which the telecoms equipment maker will pay out $1.4bn in return for the lifting of a ban that prevents it buying US components.

Europe

The Eurofirst 300 slid 0.6% over the week.

Speculation grew that the ECB may end its bond-buying programme by the end of 2018 as senior figures referred to the “underlying strength” of the eurozone economy and said such a move was “plausible”. 

In a speech, Italy’s new populist coalition government’s prime minister, Giuseppe Conte, said he was confident of the country’s “negotiating power” as it headed into potentially tense clashes with the EU.

The final reading of the eurozone’s first-quarter GDP showed the eurozone economy grew 0.4% in the first quarter of 2018, its weakest pace since the third quarter of 2016. Hopes that economic momentum would pick up in the second quarter were dashed when industrial production fell 1.0% and 0.5% over April in Germany and France respectively. Both figures were weaker than expected.

Eurozone retail sales rose 0.1% over April, but March’s data was revised up to 0.4% from a previous estimate of 0.1%. On a year-on-year basis, sales were 1.7% higher in April.

Eurozone investor confidence, as measured by Sentix, fell to 9.3 in June, its lowest point since October 2016 due to the political uncertainty in Italy and fears of a trade war with the US.

New factory orders in Germany fell for the fourth month in a row in April, declining 2.5%. Data for March was also revised lower to a 1.1%, compared to the initial estimate of -0.9%.

Swiss inflation hit to 1% for the first time in more than seven years in May.

The Greek economy expanded 2.3% on a yearly basis in the first quarter, its highest level in a decade.

Japan

The Nikkei 225 rose 2.4% over the week.

Household spending fell 1.3% in April, the third consecutive contraction and suggesting a sluggish end to spending in the first quarter of 2018 carried on into the second.

Pacific Basin

Australia’s GDP expanded at a faster-than-expected rate of 1.0% in the first quarter, boosted by export strength, particularly in commodities.

Chinese exports rose 12.6% on a year-on-year basis in May, compared to a 12.9% rise in April. Imports accelerated to a year-on-year rise of 26.0%, compared to 21.5% in April.

Malaysia’s recently-elected prime minister said on Wednesday that the country’s central bank governor had resigned, in the latest leadership shakeup since the landmark election in May.

Philippine exports shrank 8.5% year on year in April, according to the Philippine Statistics Authority. This compared to a fall of 8.2% in March.

Emerging Markets

Emerging markets suffered their biggest portfolio outflows in a year and a half in May, as foreign investors dumped EM assets in response to rising US interest rates and a strengthening US dollar.

In a surprise move, the Reserve Bank of India raised interest rates by 25bps to 6.25%, citing concerns about growing inflationary pressures stemming from rising oil prices and recent currency depreciation. This represents India’s first increase in interest rates in four years, as well as its first the first since its central bank adopted a new inflation target of 4%.

Mexico announced regulatory tariffs against a wide range of US agricultural imports, including whisky, cheese, steel, bourbon, and pork, as well as steel.

South Africa’s GDP dropped an annualised 2.2% in the first quarter of the year.

Turkey’s inflation rate climbed to 12.15% on a year-on-year basis in May, up from 10.85% in April, according to official data from the Turkish Statistical Institute. In response, the Turkish central bank raised rates by a larger-than-expected 125bps to 17.75%.

Brazilian shares fell, mirroring the fall in the real which has sunk to levels not seen since the country’s impeachment crisis two years ago. Sentiment towards Brazil has been damaged by the government’s recent intervention in diesel prices to calm striking truckers. This fuelled concerns that the country might elect a populist as president in October and cast doubt on the chances that the nation will pass market-friendly fiscal reforms. Brazilian inflation — as measured by the IPCA index — accelerated to an annualised pace of 2.86% in May, the highest since January.

Bonds

Bonds were volatile as the European Central Bank hinted it may end its bond-buying programme later this year. On one day alone, the yield on the 10-year US Treasury bond hit both a one-week low of 2.884% and a two-week high of 2.977%. The news also pushed the yield on the 10-year German Bund back above 0.5%. Meanwhile, in Italy, 10-year bond yields moved back above 3.0%.

Commodities

Copper rose to a four-year high of over $7,300 a tonne amid fears of a strike at the Escondida mine in Chile.

Currencies

The Mexican peso hit a 15-month low against the US dollar, as hopes dimmed over the prospects for a new North American Free Trade Agreement following a sharp escalation in the tit-for-tat trade war between the US and Mexico. The Brazilian real hit a two-year low against the US dollar, but subsequently rallied after Brazil’s central bank announced plans to step up its defence of the embattled currency.

In contrast, the Turkish lira rallied as Turkey’s central bank raised rates.