Global Markets Update - Monday 19 June 2017

Posted on 19 Jun 2017

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United Kingdom

The FTSE 100 lost 0.8% over the week amid political uncertainty and worries over consumer spending.

Minutes of the Bank of England’s latest MPC meeting showed that it came close to raising interest rates in May due to increasing concerns that inflation was taking hold in the UK economy. Three members voted to raise rates, while five voted to keep rates unchanged.

UK inflation rose to 2.9% in May, up from 2.7% in April due in part to the rising cost of foreign package holidays and imported computer games.

Average earnings fell in real terms by 0.6% in three months to April, compared with the same period last year. Before inflation, earnings rose by 1.7% excluding bonuses and were up 2.1% including bonuses.

Unemployment fell by 50,000 to 1.53 million in the three months to April - the lowest since records began 1975.

UK retail sales fell 1.2% in May, the slowest rate for four years and following a rise of 2.3% in April.

US

The S&P 500 slipped 0.1% over the week. Retailers lost ground on the news that Amazon is muscling in on supermarkets.

The US Federal Reserve raised interest rates by 25bps to a range of 1.0% to 1.25%. It also maintained its forecast for a further increase in the second half of 2017, and three more in 2018 and set out plans to begin scaling back its balance sheet later this year. The FOMC stated that further gradual hikes are warranted as inflation will stabilise around the 2% objective ‘over the medium term’, downplaying the recent drop in core inflation as temporary.

The Bank of Canada surprised market commentators by saying that its next move in interest rates would be up, not down. Investors had expected a rate rise no sooner than 2018.

US retail sales slid 0.3% in May, the largest drop in 16 months, although previous months’ readings were revised higher.

US consumer prices fell 0.1% in May, taking the year-on-year increase down to 1.9% from 2.2% in April. Core consumer prices fell to a two-year low of 1.7% on a year-on-year basis, down from 1.9% in April.

Amazon is to buy Whole Foods, the biggest premium US grocer, for $13.7bn in a deal that marks its biggest push into traditional retailing yet.

Europe

The FTSE Eurofirst 300 slid 0.5% over the week.

Industrial production rose by 1.4% in both the eurozone and EU in the 12 months to April, compared with a 2.2% increase in March, due to falling oil prices.

Concerns over an early election in Italy ebbed after the anti-establishment Five Star Movement suffered a string of defeats in municipal elections.

Japan

The Nikkei 225 lost 0.3% over the week.

The Bank of Japan kept interest rates on hold at -0.1% and said it would continue to buy assets at a pace of ¥80tn a year. However, it tweaked its view of the economy upwards in a steady-as-she-goes decision on monetary policy 

The Japanese central bank said the economy was “turning toward a moderate expansion” and that private consumption had “increased its resilience”, a mild upgrade from its previous language in April, when it merely said that spending was “resilient”.

Pacific Basin

The Hong Kong Monetary Authority raised its base rate by 25bps following a similar move made by the US Federal Reserve.

News that Anbang Insurance Group’s chairman had been detained by the Chinese authorities caused shares in several mainland listed companies to fall, including China Vanke and China Merchants Bank. Anbang holds stakes in both companies.

Emerging Markets

Emerging market stocks are among the strongest performers so far this year, primarily due to very robust returns from Asia tech shares.

Indian retailers are reportedly slashing prices as they rush to clear existing stock before the new goods and services tax comes into effect on 1 July.

Russia’s central bank reduced its key interest rate by 25bps to 9, saying inflation, which hit 4.1% in May, was close enough to its target of 4% by the end of the year to allow a cut.

Bonds

The yield on the two-year Treasury note rose to 1.35%, its highest level in a month as investors priced in another 25bps hike in US interest rates. The 10-year US bond yield fell as low as 2.10% before the FOMC meeting, but closed the week at 2.15%.

Inflows into high yield bond funds have been just $1billion so far this year, yet lower quality triple C-rated bonds have outperformed higher quality double B-rated bonds by more than 200 bps.

Currencies

The US dollar rallied after the Fed was more hawkish than had been expected.