Global Markets Update - Monday 12 June 2017

Posted on 12 Jun 2017

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In general, global stockmarkets shrugged-off the UK general election result indicating significant uncertainty had already been priced into markets due to the forthcoming Brexit negotiations. Sterling was the main casualty.

The OECD revised its prediction for global growth this year to 3.5%, up from 3.3% in March, as increased trade and investment flows offset a weaker outlook in the US. This would be the global economy’s best performance since 2011

United Kingdom

The FTSE 100 slid 0.3% over the week as sterling’s fall helped to limit losses for large, multinational companies. However, the FTSE 250, which contains more domestically focused shares, fell.

Theresa May’s decision to call a snap general election spectacularly backfired when the Conservative Party won the most votes but failed to win a parliamentary majority, losing 13 seats overall. The prime minister was forced to enter into an agreement with Northern Ireland’s DUP to be able to form a government. The SNP fared even worse, losing 21 seats as voters appeared to reject calls for a second referendum on Scottish independence.

The election outcome was seen to lower the chance of a hard Brexit but raised serious concerns as to the weakened government’s ability to get parliamentary approval for the myriad of decisions that need to be made.

Industrial output rose by 0.2% in May, much lower than the 0.8% increase expected. Manufacturing output grew by 0.2%, which was also much weaker than expected.

The IHS Markit services purchasing managers’ index slid to a weaker-than-expected 53.8 in May, down from 55.8 in April, amid lower growth in new orders and weak consumer spending.

Retail sales rose at an annual rate of 0.2% in May, slowing sharply from the 1.4% rate seen in April. Barclaycard also reported that consumer spending had fallen to a 10-month low in May.

US

The S&P 500 inched higher by 0.1% over the week.

US technology shares tumbled abruptly on Friday, leaving the sector on track for its heaviest drop since the day following last year’s Brexit vote. It was not clear what caused the sharp move, but profit-taking is a potential rationale.

In his testimony to Congress, former FBI director James Corney accused the White House of lying. He said President Trump had demanded “loyalty” in a private meeting four months before he was fired and that the president had urged him to drop any probe related to national security adviser Michael Flynn’s misleading of White House officials about conversations held with the Russian ambassador.

The ISM non-manufacturing index fell to a lower-than-expected 56.9 in May from 57.5 in April.

Europe

The FTSE Eurofirst 300 dropped 0.5% over the week.

The European Central Bank dropped its easing bias on interest rates and said that it now judged the risks to the eurozone economy to be “broadly balanced”. This was a marked change from comments in April, which described the risks to growth as "tilted to the downside". ECB president Mario Draghi also hinted that there was no need to cut rates further, saying "we are now confident that inflation will converge with our objectives" but maintained its pledge to expand QE if conditions deteriorated.

The ECB now expects growth across the eurozone to be 1.9% in 2017, compared with its March forecast of 1.8%, and increased its growth projection for 2018 to 1.8% from 1.7%, and for 2019 to 1.7% from 1.6%. In addition, it downgraded its outlook for inflation to 1.5% in 2017, from 1.7%, and revised its inflation outlook for the following years to 1.3% in 2018, and 1.6% in 2019 as against 1.6% and 1.7% respectively.

Banco Santander bought Banco Popular for €1 after EU authorities declared the smaller lender was “likely to fail”. The deal helped to calm concerns about the region’s banking sector.

Japan

The Nikkei 225 slid 0.8% over the week.

Japan's first quarter GDP growth was revised down to an annualised rate of 1.0%, from an initial reading of 2.2%. Since the downward revision was mainly due to an unexpected decline in oil inventories, most analysts expected the underlying pace of growth to be unaffected.

Shares of Japan's Softbank surged to their highest in nearly two decades after the firm bought robot-maker Boston Dynamics from Google's Alphabet.

Pacific Basin

China's exports rose by 8.7% from a year ago, beating estimates of a 7% rise, amid strong demand from Europe. Imports shot up by 14.8%, compared with estimates of 8.5%.

Emerging Markets

Brazil’s inflation fell to a 10-year low of 3.6% in the 12 months to the end of May, down from an increase of 4.08% in April. Consumer prices have now eased for the ninth straight month to the lowest level since May of 2007, and well below the central bank’s target of 4.5%.

South Africa’s GDP contracted 0.7% on an annualised basis in the first quarter of 2017. The fall followed a 0.3% contraction in the last quarter of 2016 and means the country has entered its second recession in eight years.

Qatar was isolated by its neighbours, including Saudi Arabia, Egypt, Bahrain and the United Arab Emirates, who cut diplomatic, transport and trade ties amid allegations that Qatar backs militant groups including so-called Islamic State and al-Qaeda. Qatar denied the accusations.

Bonds

The yield on the 10-year US Treasury bond fell amid concerns over several key risks but closed the week at 2.22%, up 8bps over the week.

In Europe, the yield on the 10-year German Bund closed the week unchanged at 0.27%. 10-year UK gilt yields remained near 1.0%. In Italy, the yield spread over Germany of the 10-year benchmark bond narrowed as the chances of early elections in the country appeared to diminish.

The yield spread on B-rated US bonds, the highest rated band of junk bonds, narrowed to its lowest level in almost a decade as investors searched for yield.

Currencies

Sterling touched to a low of $1.2635 against the US dollar as the UK general election resulted in a hung parliament.

The Mexican peso hit its highest level in a year after a win by the ruling party, the PRI, in the nation’s largest state. Polls had predicted a tight race.

Commodities

Oil prices fell to a one-month low after data showed US inventories rising for the first time in nine weeks.