GLOBAL MARKETS UPDATE - MONDAY 18 DECEMBER 2017

Posted on 18 Dec 2017

Global stockmarkets rallied, overcoming another rate rises by the US Federal Reserve as sentiment was boosted by signs the Republicans would succeed in pushing through tax reform.

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United Kingdom

The FTSE 100 gained 1.3% over the week.

EU leaders judged that sufficient progress had been made in the Brexit negotiations to move onto phase 2, trade discussions.

The Bank of England kept interest rates unchanged, but brought forward the timing of its next projected hike by about a year. Markets now expect the Bank to raise rates twice next year.

Inflation, as measured by the consumer price index, rose to a five-year high of 3.1% in November, up from 3.0% in October, and forcing Mark Carney to write a letter of explanation to the chancellor.

UK retail sales jumped 1.6 % in November compared to a year earlier, boosted by strong Black Friday sales.

Average weekly wages rose by 2.3% in the three months to October, meaning that it real terms wage growth was negative.

US

The S&P 500 rose 0.9% over the week, with many indices touching fresh highs amid signs that the Republicans would succeed in pushing through tax reform legislation.

Telecoms were the strongest sector after the Federal Communications Commission rolled-back Obama-era net neutrality rules meant to ensure all internet services are treated equally. The reversal is seen as helpful for cable and internet service providers which will be able to charge more for particular internet services.

The Federal Reserve lifted interest rates by 25bps to 1.25%-1.5%, its third such move in 2017. It also left its forecasts for the next two years unchanged, indicating it expects three more rises in 2018 and two in 2019, and increased its growth projections for 2017 and 2018 to 2.5%, due to the impact of tax cuts, but said it continued to expect inflation to stay below its target.

Headline consumer prices rose by 0.4% in November, due mainly to a sharp jump in gasoline prices. The “core” CPI, which excludes volatile food and energy prices, rose by 0.1%, reducing the annual rate to 1.7% from 1.8% in October.

US headline producer prices rose 0.4% in November, taking the year-on-year increase to 3.1%. Excluding food, energy and trade services, “core” producer prices also rose 0.4% in November, and were 2.4% higher than a year ago — the biggest annual increase since mid-2014.

US retail sales jumped 0.8% in November, and October’s increase was revised upwards.

Walt Disney bought 21st Century Fox’s entertainment business for $52bn.

Europe

The FTSE Eurofirst 300 slid 0.2% over the week.

ECB president Mario Draghi hailed the “strong pace of economic expansion and a significant improvement in the growth outlook”. However, he noted that muted domestic price pressures had “yet to show convincing signs of a sustained upward trend”, making it important to maintain the bank’s asset purchase programme.

Flash readings for Germany’s IHS Markit composite purchasing managers’ index hit an 80-month high of 58.7 in December. While services rose, manufacturing activity hit a record high, boosted by strength in exports.

Eurozone industrial production rose 0.2% in October, taking the year-on-year increase to 3.7%. Ireland was the strongest market, rising 13.4%, led the pack for the year, with a rise of 13.4 per cent, while the Netherlands was the lowest, falling 0.4%.

Norway’s central bank said it expects to raise interest rates “somewhat earlier” than it had expected in September as its inflation predictions were “somewhat higher” than previously.

The Swiss National Bank lifted its inflation forecasts, indicating it may be preparing for rises in the interest rate.

Japan

The Nikkei 225 lost 1.1% over the week.

The Bank of Japan’s Tankan survey showed business sentiment for large manufacturers is at its strongest level in 11 years, rising to +25 in the fourth quarter. 

Japan’s government announced tax reforms which included raising taxes for high earners (those earning more than around $75,000). It also said it would cut corporation tax — but only for companies that sharply increased wages.

Pacific Basin

The People’s Bank of China and the Hong Kong Monetary Authority raised rates following a similar move by the US Federal Reserve. In China, rates were raised by 5bps while Hong Kong raised rates by 25bps.

Investment in China’s real estate market rose at the slowest pace in nearly a year in November.

Emerging Markets

Turkey’s GDP expanded 11.1% in the third quarter, up from 5.1% in the previous quarter and the highest level in six years. However, the central bank disappointed market expectations of a full 1% rate rise when it hiked rates by just 50bps to 12.75%.

Russia’s central bank surprised markets by cutting interest rates by 50bps to 7.75%. The central bank noted that the move to reduce oil production will dampen inflation risks over a one-year horizon.

Mexico’s central bank raised rates by 25bps to an 8-year high of 7.25%, following a similar move by the US Federal Reserve.

Bonds

The US yield curve continued to flatten, with two-year yields closing the week at 1.85% while 10-year yields rose to 2.37%.

Commodities

Brent crude hit a two-year high on news of a major pipeline shutdown in the North Sea.