Global Markets Update Monday 2 July 2018

Posted on 02 Jul 2018

Global M&A activity reached $2.5tn in the first half of 2018, an all-time high for the start to a year and up 65% compared to the same period the previous year amid surging deals in the US media and telecoms sectors. Comcast and Disney are locked up in a $70bn bidding war to buy the majority of 21st Century Fox as well as a £22bn battle to acquire Sky; Irish drugmaker Shire was bought by Japan’s Takeda for $77bn; and T-Mobile and Sprint merged in a  $59bn deal.

Investors pulled $29.7bn from equity funds in the week ended 27 June 2018 amid growing concerns over the escalating trade war. This was the second largest weekly outflow since 2000, according to data provider EPFR.

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United Kingdom

The FTSE 100 fell 0.6% over the week.

UK GDP growth for the first quarter was revised up to 0.2%, compared to a previous estimate of 0.1%, due to higher-than-expected construction output.

The ONS index of services showed that growth in the UK’s key service sector increased 0.3% in April, the fastest monthly rate since last November.

Ahead of a crucial week for Theresa May when the cabinet needs to agree on its Brexit approach, EU leaders hinted that they would respond positively if she shifted her “red lines”.

US

The S&P 500 lost 0.9% over the week.

The final reading of US first-quarter GDP showed that the economy expanded by 2.0%. Earlier readings had suggested that growth was running at an annualised pace of 2.3% and 2.2% respectively.

The Fed’s preferred measure of inflation, the core PCE price index, rose 2.0% compared to a year ago in May.

This is the first time in six years that it has hit the Fed’s official target. 

Harley-Davison said it would shift some production to the EU to avoid new tariffs imposed as a result of the tit-for-tat trade war. In response, Donald Trump threatened to tax the company “like never before”.

Amazon bought US online pharmacy PillPack, leading to sharp falls in Walgreens Boots Alliance, CVS Health and Express Scripts.

Europe

The Eurofirst 300 dropped 1.3% over the week.

EU leaders agreed new policies on asylum seekers, helping to ease the pressure on Angela Merkel. Her main coalition partner had threatened to close Germany’s borders if she did not tackle the refugee crisis. With Austria also saying it would follow any move by Germany, this threatened the EU’s passport-free Schengen area.

Headline eurozone inflation rose to 2% in June, while core inflation slipped to 1%.

Japan

The Nikkei 225 fell 1.0% over the week.

Japan’s unemployment rate fell to 2.2% in May, the lowest level in 25 years.

Japan’s retail sales slid 1.7% over the month of May, the fastest decline in 21 months.

Pacific Basin

The Shanghai Composite index continued to decline. The index has now officially in a bear market, having fallen more than 20% from its two-year high in January.

The People’s Bank of China cut the reserve requirement ratio for banks to help cushion a slowing economy and the impact of a potential trade war with the US

Emerging Markets

The Czech central bank raised interest rates by 25bps to 1% as a strong economy and record-low unemployment pushes up wages and hence inflation. This is its fourth rate rise in a year.

President Erdogan won the election in Tukey, securing another five years in office and leaving investors wondering whether he will follow through on some of his pre-election promises, such as to take great control of interest rates.

Bonds

The yield on the 10-year US Treasury bond closed the week at 2.85%, while the yield on the US two-year note closed at 2.53%. During the week, the yield gap between the two maturities fell as low as 30.9 basis points, the lowest for more than a decade.

The 10-year German Bund yield closed the week at 0.30%.

Currencies

The Chinese renminbi weakened over 3% against the US dollar in June, its worst single-month decline since China established its foreign exchange market in 1994.