Global Markets Update Monday 18 February 2019

Posted on 18 Feb 2019

Talks between the US and China broke down without any progress, but the two sides will resume discussions next week ahead of a 1 March deadline, after which Washington could increase tariffs on $200 billion in Chinese goods in the event of no deal.

Global Market Update

United Kingdom

The FTSE 100 rose 2.3% over the week. UK retail sales rose 1% in January, reversing the 0.7% decline recorded in December, with discounts in clothing helping to boost sales. UK inflation fell to a two-year low increase of 1.8% year on year in January, compared to 2.1% in December. This was the first time since 2017 that the measure had fallen below the Bank of England’s official target of 2%. Falling energy bills and lower fuel costs helped to spur the lower inflation reading. UK GDP contracted 0.4% in December, the biggest monthly fall since March 2016. Over the fourth quarter, the UK economy grew by 0.2% while growth for 2018 came in at 1.4%, the lowest since 2009.

US

The S&P 500 rallied 2.9% over the week. President Trump signed a deal that averted another government shutdown but declared a national emergency to seek additional funds for his wall with Mexico. Headline US inflation eased to 1.6% in January, down from 1.9% in December and the slowest pace of growth since June 2017. Core inflation, which excludes food and energy, held steady for the third consecutive month, rising 2.2% compared to a year earlier. Headline US retail sales dropped 1.2% over December, the biggest monthly drop since 2009. The Empire State Manufacturing Survey climbed to 8.80 in February, its first rise in three months.

Europe 
The Eurofirst 300 gained 3.0% over the week.
The German economy recorded no growth between October and December, meaning that it narrowly avoided entering a technical recession defined as two consecutive quarters of falling output. German GDP shrank 0.2% in the third quarter of 2018.
Spain’s prime minister called a snap general election after parliament rejected the ruling socialist government’s budget proposals. The election will be Spain’s third in just four years.

Japan
The Nikkei 225 rose 2.8% over the week.
Third-quarter profits at Japanese companies fell at the sharpest rate since the Fukashima earthquake and tsunami in 2011 amid an abrupt slowdown in China’s economy due to its ongoing trade dispute with the US. According to SMBC Nikko Securities, 1,014 of companies in the benchmark Topix index reported third-quarter operating profit had dropped at least 2.6% compared to the same quarter the previous year. 
 
Pacific Basin
Having been among the laggards last year, Chinese equities have rebounded so far in 2019 and are riding near the top of the performance tables on a year-to-date basis, boosted by a dovish Fed, optimism of improved US/China trade relations and further stimulus measures from the Chinese authorities. Chinese exports rebounded 9.1% year-on-year in January, after falling 4.4% in December. Imports declined 1.5% in January as worries over weakening domestic investment and consumption persisted. The data was distorted by the timing of the Lunar New Year.

Emerging Markets
Mexican industrial production fell 2.5% year-on-year in December, its biggest drop in eight months. The peso weakened on the news.
 
Bonds
The yield on the 10-year Treasury closed the week at 2.67%, while the yield on the 10-year German Bund closed the week at 0.1%. Tobacco giant Altria Group raised $11.5 billion from the sale of corporate bonds to help fund its purchase of a 35 per cent stake in e-cigarette maker Juul Labs. The issues were rated triple B, placing them just above junk-grade status. Santander stunned bondholders when it decided against the early repayment of a €1.5 billion bond. The bond sits in the additional tier 1 category and, while perpetual, the market operates under the gentleman’s agreement that lenders will repay bonds at the first opportunity. Deutsche Bank’s decision to do the same a decade ago led to significant tremors in the European corporate bond market.

Commodities
Oil prices, as measured by Brent crude, rose back above $55 a barrel, buoyed by comments from the Saudi Arabia’s energy minister that the kingdom would limit production.

Currencies
The euro slipped near two-year low after Benoît Coeuré, a top European Central Bank official, indicated the ECB was discussing the possibility of another round of long-term loans to banks given the eurozone’s slowdown was worse than forecast. The New Zealand dollar surged after the Royal Bank of New Zealand said it expected to leave interest rates at their current levels for the rest of 2019 and all of 2020. This is in contrast to increasingly dovish leanings at other global central banks.