Global Markets Update Monday, 12 February 2018

Posted on 12 Feb 2018

Global stockmarkets remained volatile with global stocks suffering a second successive week of steep declines as they headed for the worst week since 2011. The S&P 500, Dow Jones Industrial Average and Euro Stoxx 50 Indices entered a ‘correction’, defined as a 10% sell-off from a recent high.

Global Market Update - 12-02-18

United Kingdom

The FTSE 100 dropped 4.7% over the week.

In its quarterly Inflation Report, the Bank of England said rates would need to rise "earlier" and by a "somewhat greater extent" than they thought at their last review in November in order to offset the effects of stronger global growth on UK inflation. The Bank also noted that wage growth was starting to pick up, with the annualised rate of growth of pay rising to around 3% in the second half of 2017.

The EU’s chief Brexit negotiator, Michel Barnier, warned that a transition deal to allow more time for the UK’s departure from the bloc might not be reached. Brussels also warned that it would suspend the UK’s access to the single market if it breached the terms of any transition deal.

The IHS Markit services purchasing managers’ index fell to 53.0 in January, from 54.2 the previous month.

Construction output fell 0.7% in the final quarter of 2017. This was the third consecutive quarter of declines the longest period of falling output since the third quarter of 2012.

US

The S&P 500 lost 5.1% over the week, taking it into negative territory over the year to date.

The Institute of Supply Management’s service sector index rose to a 12-year high of 59.9 in January.

The US trade deficit grew 12.1% to its highest level since 2008 in Donald Trump’s first year in office, suggesting that the president is making little headway in his promise to rewrite America’s trading relationship with the world.

Twitter shares hit a two-and-a-half year high after it posted its first quarterly net profit.

Europe

The MSCI Europe declined 4.9% over the week.

A raft of European banks reported better-than-expected results, boosted by ongoing cost-cutting and the strength of the eurozone economy. Italy’s UniCredit posted its best fourth-quarter profit in a decade, while Société Générale and Germany’s Commerzbank also outstripped forecasts.

Angela Merkel agreed a grand coalition deal with the SPD, but they deal has yet to be put to the vote of SPD members.

Norway’s economy unexpectedly contracted 0.3% in the closing months of 2017, well below forecasts for a 0.6% expansion. In addition, core inflation fell to 1.1% in January, prompting a sharp drop in the country’s currency.

Japan

The Nikkei 225 plunged 8.1% over the week.Pacific Basin

China’s CSI 300 Index fell to its lowest level in four months.

China’s official consumer price index rose 1.5% compared to a year earlier in January, down from a rate of 1.8% in December. Producer prices rose 4.3% in January, just down from a 4.9% increase in December.

China’s exports grew 11.1% year on year in January, compared to 10.9% in December, according to China’s General Administration of Customs. Imports surged 36.9% compared to a year ago, well above over December’s growth rate of 4.5%, due in part to the timing of the Lunar New Year and a recovery in oil prices from a year earlier.

Indonesia’s economy grew 5.19% on a year-on-year basis in the final quarter of 2017, the quickest pace in four years.

Emerging Markets

Brazil’s central bank lowered the country’s benchmark Selic rate by another 25 bps to a historic low of 6.75%, following 10 consecutive cuts. The move follows news that Brazil’s inflation rate eased to an annual rate of 2.95% in December.

The Reserve Bank of India kept its benchmark interest rate steady at 6%,but warned of the growing risks of higher inflation.

Turkish inflation eased to 10.35% in January, down from 11.92% in December as the strength of the lira helped to contain prices.

Bonds

The yield on the 10-year US Treasury bond touched a four-year high of 2.885%, before closing the week at 2.81%.

The yield on the 10-year German Bund closed the week at 0.74%, while peripheral spreads narrowed with the 10-year Spanish-German spread hitting its narrowed since 2010 while Italian spreads fell to their narrowest since September 2016, despite forthcoming elections.

The yield on the two-year UK Gilt rose 5 basis points to 0.69% to the highest since November 2015, while the yield on the 10-year benchmark bond touched a high of 1.62%, after the BoE strengthened expectations that the next rate rise could come as early as May.

US junk bond yields rose to 6.2% compared to a low of 5.5% in January, according to the Bloomberg Barclays index.

Commodities

Oil prices continued to retreat amid concerns about record levels of crude production in the US.

Currencies

Sterling was volatile, rallying when the Bank of England hinted that UK interest rates may rise more quickly than expected and then selling off amid fears that the UK may not reach agreement on a transition arrangement with the EU.