Global Markets Update Monday 16 December 2019

Posted on 16 Dec 2019

Risk assets rallied on news that the US and China had struck a “phase one” trade deal. The decisive UK election result further boosted markets as it provided clarity on the Brexit outlook and resolved the parliamentary impasse. 

In a “phase one” trade deal, China is to buy at least $40bn of US agricultural goods annually while the US agreed not to proceed with a new escalation in levies on $156bn of Chinese consumer goods planned for Sunday 15th December. The US will also cut tariffs on $120bn of Chinese imports that were introduced in September but will maintain 25% tariffs on about half of all Chinese imports, worth about $250bn.

UK
The FTSE 100 jumped 1.6% over the week, while the domestically focused FTSE 250 soared 2.7% to touch record highs. UK assets rebounded as the Conservative Party’s decisive election victory meant the UK no longer faced a parliamentary impasse. Banks and utilities were among the best performers as the threat of nationalisation was removed. Housebuilders also surged.  

Despite opinion polls signaling that the Conservative Party’s lead in the election campaign was narrowing, Boris Johnson won a landslide victory, securing a majority of 80 seats, the Conservative’s largest since 1987. The SNP also consolidated its lead in Scotland (further fueling the call for a second independence referendum). The Labour Party saw its worst result since 1935. The election result means the UK will now leave the EU on 31 January 2020 at the latest – but faces a tough period of negotiation to agree a new trade deal with the EU in just 11 months. Prime Minister Boris Johnson has vowed not to extend trade talks beyond the end of 2020. 

The UK economy recorded no growth in October, following two consecutive months of falling output. Although the service sector expanded 0.2% in the August-to-October period, that was offset by a 0.7% contraction in manufacturing and 0.3% fall in construction. 

US

The S&P 500 rose 0.7% over the week, with major indices once again approaching fresh record highs.

The Federal Reserve kept interest rates on hold and signaled it would keep policy on hold through 2020. It also delivered an upbeat assessment of the US economy, saying that the current stance of monetary policy was “appropriate”, a change from October’s statement, and cut a reference to “uncertainties” in its outlook. The Fed indicated that it would wait to raise rates until there was “a significant move up in inflation that’s also persistent”.

US retail sales grew by a smaller-than-expected 0.2% over November, with both clothing sales and sales at department stores falling, while online sales increased.

US consumer prices rose 2.1% on an annual basis in November, while core consumer prices rose 2.3%. Underlying inflation was boosted by higher prices for medical care, used cars, clothing and recreation, while rents also climbed. 

Europe 

The FTSEurofirst 300 gained 1.0% over the week.

The European Central Bank and stuck to its bond-buying programme. In the latest sign that European spending rules may be relaxed, the head of the Bundesbank warned that its commitment to a balanced federal budget should not become “a fetish”.

The Zew survey of German investor sentiment increased from minus 2.1 to a better than expected 10.7. That is its first positive reading since April and the highest level since February 2018. The brightening outlook for the German economy was also reflected in the monthly Sentix survey of investors which rose to its highest level in almost two years. German exports also improved in October, rising 1.2% on a year on year basis.

Eurozone industrial production shrank 0.5% in October, while September’s expansion was revised downward to a 0.1% contraction. 

Japan 

The Nikkei 225 jumped 2.9% over the week.

Japan’s third-quarter GDP growth was revised up to an annualised rate of 1.8% from an initial estimate of 0.2%. The robust print may reflect spending being bought forward to beat the planned 2% Sales Tax increase on 1 October.

The Bank of Japan’s Tankan index of confidence at large manufacturers fell to a reading of zero in December, its fourth consecutive quarter of decline, amid ongoing weakness in exports because of the US-China trade war. 

Pacific Basin

Chinese exports fell 1.1% on a year-on-year basis in November, the fourth consecutive monthly fall, with exports to the US down 23%.

Emerging Markets

Russia’s central bank cut interest rates by 25 basis points to 6.25%, its fifth rate cut this year, as inflation expectations continue to slow.

Brazil’s central bank cut rates by 50 basis points to a fresh record low of 4.5%, its fourth consecutive rate cut, despite a recent sharp drop in the real.

Turkey’s central bank cut interest rates by 2%, meaning rates have been lowered by a total of 10% since July.

Saudi Aramco’s shares surged on its trading debut, pushing the state oil group’s valuation above $2tn.

Bonds

The yield on the 10-year US Treasury closed the week at 1.82%, while the yield on the 10-year German Bund closed the week at -0.29%. 

Currencies

The British pound surged to almost $1.35 and over €1.20 when an exit poll indicated the Conservative Party would win a significant outright majority in the UK general election.