Global Markets Update Monday 14 August 2018

Posted on 14 Aug 2018

Global stockmarkets weakened as the week progressed amid a deepening financial crisis in Turkey. Rising risk aversion hit banks in particular. In contrast, core government bond yields fell.

The trade war between the US and China intensified: the US imposed 25% tariffs on $16 billion of Chinese goods, including motorcycles, industrial chemicals and railway carriages, while China retaliated with the same duty on $16 billion of US exports of oil products, steel and cars. Washington also re-imposed sanctions on Iran and Russia and entered a diplomatic spat with Turkey.

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United Kingdom

The FTSE 100 inched higher by 0.1% over the week.

The UK economy grew 0.4% in the second quarter, double the pace in the first three months of the year as warmer weather boosted spending and construction.

US

The S&P 500 rose 0.35%, coming within striking distance of January’s record high.

FactSet reported that, based on the 90% of the S&P 500 that have reported second-quarter results, net profit margins have hit 11.8%, the highest level since data records started in 2008.

Core US inflation, which excludes food and energy, rose to a decade-high pace of 2.4% year-on-year in July. Headline inflation held steady at 2.9%.

Elon Musk declared he wanted to take Tesla private. The suggested valuation of the buy-out is $70 billion.

Europe

The Eurofirst 300 slipped 0.9% over the week.

The European Central Bank warned that the “downside risks to the global economy have intensified” due to the introduction of protectionist measures by the US and China.

Eurozone investor sentiment, as measured by Sentix, edged higher to 14.7 in August, compared to 12.1 in July.

Germany’s industrial production fell by a larger-than-expected 0.9% in June, although this followed a rise of 2.4% in May. There was further bad news when factory orders plunged 4% in June as overseas demand fell.

The plunge in the Turkish lira raised concerns about banks with sizeable exposure to Turkey, including BBVA, UniCredit and BNP Paribas.

Credit rating agency Fitch upgraded Greece’s long-term rating from B to BB-, citing improving public finances and relations with the nation’s European creditors.

Japan

The Nikkei 225 dropped 1.0% over the week.

Japan’s economy grew by a higher-than-expected rate of 1.9% on an annualised basis in the second quarter, a sharp bounce back from the 0.9% contraction recorded in the first quarter. Growth was boosted by private consumption and corporate investment.

Pacific Basin

The Reserve Bank of Australia kept interest rates unchanged at 1.5%, marking two years of record-low rates.

China’s official consumer price index rose 2.1% on a year-on-year basis in July, up from 1.9% in June. 

China’s exports rose 12.2% year-on-year in July, despite the start of the trade war with the US and up from an increase of 11.2% in June. Imports also surged, jumping 27.3% in July.

The Philippine economy grew by a lower-than-expected 6.0% on a year-on-year basis in the second quarter. Rising inflation weighed on growth, with the central bank widely expected to raise rates soon.

Indonesia’s economy expanded 5.27% on a year-on-year basis in the second quarter, its fastest pace of growth in more than four years.

Emerging Markets

Turkey’s deepening currency crisis sparked a retreat from emerging market currencies and equities. As the lira plunged, President Erdogan vowed to fight an “economic war”, while President Trump threatened further sanctions on the country.

Russia’s economy expanded 1.8% in the second quarter compared to the same period the previous year, as consumption was boosted by the nation hosting the Football World Cup.

Bonds

Rising risk aversion helped bonds, with the yields on the 10-year US Treasury falling to 2.87%, its lowest level in nearly three weeks, while the yield on the 10-year German Bund reached 0.32%.

Currencies

The Turkish lira continued to plunge against the US dollar, taking its fall so far this year to almost 43%.

The Russian rouble also came under pressure, falling to a two-year low against the US dollar, after the US announced plans to impose severe trade restrictions in response to the poisoning of former military intelligence agent Sergei Skripal.

The New Zealand dollar hit a two-year low versus its US counterpart as well after its central bank pushed out its forecast for raising interest rates from their record low by one year, citing downside risks to the economic outlook.

Sterling weakened as well as concerns over a “no-deal” Brexit gained momentum.