Global Markets Update Monday 26 November 2018

Posted on 26 Nov 2018

The UK and EU reached a draft agreement on the terms of the Brexit deal. While the deal gained UK cabinet approval, the prime minister faced a growing backlash from both Leavers and Remainers, although the pro-Brexit ERG failed to garner sufficient support to challenge the prime minister. This was followed by agreement on a draft political declaration that will form the basis for the UK and EU’s relationship post Brexit based on an “ambitious, broad, deep and flexible partnership”. Both documents were agreed by all 27 EU leaders.

Global technology stocks suffered heavy selling, sparked by rumours that Apple had cut production for its latest iPhone models. Semiconductor stocks were additionally undermined by Chinese accusations of price fixing levelled at the world’s top three makers of memory chips – Samsung Electronics, SK Hynix and Micron Technology.

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United Kingdom

The FTSE 100 fell 2.1% over the two-week period.

UK inflation held steady at 2.4% in October.

Retail sales fell by a worse-than-expected 0.5% in October, as a mild autumn hit sales of winter clothes. For the three months to October, retail sales rose just 0.4%, a notable slowdown from the 2.3% increase recorded for the three months to July.

Wages, excluding bonuses, grew 3.2% in the third quarter, up from 3.1% in the three months to August.

Bostin Scientific bought UK pharma company BTG for £3.3 billion.

US

The S&P 500 slumped 4.9% over the fortnight.

Speculation rose that the US Federal Reserve may be nearing the end of its tightening cycle after Richard Clarida, the Fed’s new nice-chairman, said rates are nearing the 2.5% to 3.5% range that the Fed considers to be “neutral”.

The University of Michigan’s consumer sentiment index came in at a three-month low of 97.5 for November, down from the 98.6 recorded in October as rising rates weighed on sentiment. Higher interest rates are also affecting mortgages, with refinancing applications falling to their lowest level in 18 years.

Core consumer prices rose unexpectedly by 0.3% in October, while year-over-year eased to 2.1% down from 2.2% in September.

Apple was on track for its worst month in ten years, plagued by persistent concerns that demand for iPhones might have peaked. Two of its suppliers, Lumentum Holdings and Japan Display, cut their earnings forecasts and reports indicated that Apple had cut production orders for all three new iPhone models launched in September.

Europe

The Eurofirst 300 dropped 3.0% over the two weeks.

Eurozone industrial output slid 0.3% over the month of September.

The flash estimate of the German composite purchasing managers’ index fell to its lowest level in nearly four years in November. The decline was replicated across the wider eurozone with November’s flash estimate sliding to its lowest level since late 2014 as exports suffered from the trade war with the US and slowing global growth.

The European Central Bank confirmed it would press ahead with plans to stop its bond-buying programme in December, despite recent weak economic data.

German GDP fell 0.2% in the third quarter, its first quarterly contraction in more than three years, as exports to China fell and activity was also hit by cutbacks in car production as carmakers struggle to comply with new EU emissions standards.

The Italian government said it would stick with its decision to embark on higher spending in an effort to kick-start the country’s economy, raising fears of a clash with Brussels.

Japan

The Nikkei 225 fell 2.7% over the 14 days.

Japan's GDP shrank by 1.2% on an annualised basis in the third quarter as natural disasters hit spending and disrupted exports.

Japan’s imports jumped 19.9% in October compared to the same period last year, while exports rose 8.2%, reversing the 1.2% fall recorded in September.

Pacific Basin

Broad credit in China grew at its slowest annual pace on record at 11.1% in October. Retail sales rose 8.6%, only slightly higher than May’s 18-year low of 8.5%. However, factory output accelerated marginally last month to 5.9% annual growth, up from 5.8% in September.
Fixed-asset investment also accelerated in October after the government ordered local governments to ramp up infrastructure spending

Singapore’s GDP grew 2.2% year on year in the third quarter, the slowest pace of growth in two years. Thailand’s economy grew 3.3% year on year in the third quarter, disappointing expectations due to lower tourism numbers. Malaysia’s economy grew 4.4% year on year in the third quarter, the slowest pace in two years as exports dragged on growth.

Bank Indonesia unexpectedly raised interest rates for the sixth time this year, taking them to 6%. The move was prompted by a surprise jump in imports in October.

Emerging Markets

Mexico’s central bank raised interest rates by 25bps to a nine-year high of 8%, as it warned of looming pollical risks. Following the decision to scrap airport plans, uncertainty was further heightened amid a bill that would axe many charges and fees that make up as much as a third of banks’ income in Mexico.

The South African Reserve Bank raised its benchmark repo rate by 25bps to 6.75%, despite a gloomier outlook for growth and inflation.

Bonds

The 10-year US Treasury yield hit a seven-week low of 3.036%. US breakeven rates, as measured by the yield difference between 10-year nominal and inflation-linked Treasuries, slipped below 2.0%, indicating investors expect inflationary pressures to fade as growth slows.

Credit spreads on US sub-investment grade energy bonds have risen to the highest level since August 2017. The sell-off affected the broader high-yield market, with yields rising back to 7% – the highest level since July 2016 – while credit spreads near 400 basis points over Treasuries, the upper boundary seen since April 2017.

For the first time since the global financial crisis, local currency emerging market bonds yield less than their theoretically safer dollar equivalents.

Currencies

Sterling was volatile, rallying on news of a Brexit agreement before relinquishing earlier gains amid fears that the prime minister will be unable to get the deal through parliament.

The US dollar index continued to fall from the 17-month high hit earlier this month, amid comments suggesting that US interest rates were nearing “neutral”.

Commodities

Oil, as measured by Brent crude, fell back below $60 a barrel, taking it to its lowest level since October 2017. The fall was prompted by Opec once again lowering its forecast for 2019 oil demand growth and doubts over whether Saudi Arabia would cut production following pressure from President Trump.