Global Markets Update Monday 5th November 2018

Posted on 05 Nov 2018

Having suffered their worst month since 2012 in October, global stocks started November on a brighter note, lifted by hopes of a thawing in US-Chinese trade tensions.

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United Kingdom

The FTSE 100 jumped 2.2% over the week.

Speculation rose that the UK and EU have reached an agreement on trade in financial services after Brexit, although the suggestion that a deal has been finalised was rejected in London and Brussels. Senior British and Irish ministers also said Brexit negotiators are “very close” to resolving differences over Ireland’s border.

The Bank of England indicated that, if the UK manages a smooth exit from the European Union, interest rates would need to 1.5% over the next three years to control inflation. However, Mark Carney emphasised that if Britain crashed out of the EU without a deal, the bank would struggle to rescue the economy.

Chancellor Philip Hammond used a £13bn windfall from better-than-expected tax receipts to lower taxes and increase spending in his annual budget.

The purchasing managers’ index for the manufacturing sector slid to 51.1 in October, the lowest level since mid-2016.

October’s construction purchasing managers’ index rose to a stronger-than-expected 53.2, up from 52.1 in September.

US

The S&P 500 surged 2.5% over the week.

The Trump administration is to reinstate all US sanctions on Iran removed under the 2015 nuclear deal.

The US economy added a stronger-than-expected 250,000 jobs in October, helping the jobless rate to remain at a 49-year low of 3.7%.

Average hourly wages grew at an annual rate of 3.1% in October, accelerating from a rate of 2.8% in September and the strongest annual rise since April 2009.

The ISM manufacturing purchasing managers’ index slumped to 57.7 in October, compared to 59.8 in September.

Apple shares dropped after it provided disappointing earnings guidance for the forthcoming holiday season.

Europe

The Eurofirst 300 rebounded 3.0% over the week.

After a series of disappointing regional election results, Angela Merkel said she would step down as the leader of the CDU although she indicated she would stay on as Chancellor until 2021.

Eurozone inflation hit 2.2% in October, the highest rate since December 2012, due to rising energy prices. Core inflation, which strips out food and energy, rose to 1.1% in October, up from 0.9% the previous month.

Eurozone GDP growth slowed to 0.2% in the third quarter, from 0.4% in the previous quarter and the slowest quarterly rate of growth since 2014. While French growth accelerated, Italy recorded no quarterly GDP growth at all and German car production was hit by new emissions tests.

German retail sales rose just 0.1% in September. However, this compares to falls for the previous two months.

German consumer prices rose 2.4 per cent year-on-year in September, the fastest increase in six years, due to higher energy costs.

Japan

The Nikkei 225 rallied 5.0% over the week.

Japan’s industrial production fell by a larger-than-expected 1.1% in September.

Pacific Basin

The Caixin China manufacturing purchasing managers’ index nudged up to 50.1 in October form 50 in September. This follows the official PMI reading which fell to its weakest level since July 2016 in October.

Hong Kong stocks closed with the strongest weekly gains in three years after.US president Donald Trump said trade discussions with China were “moving along nicely”.

The Nikkei-Markit Taiwan manufacturing purchasing managers’ index came in at 48.7 in October, down from 50.8 a month earlier. The data indicates that activity is contracting for the first time since May 2016 amid rising concerns the fallout from the US-China trade war is hurting the Taiwanese economy.

South Korea’s consumer price index rose 2% year on year in October, showing prices are rising at their fastest pace in 13 months. Shares in large South Korean memory chip manufacturers, such as SK Hynix and Samsung Electronics, received a boost after the US government restricted exports of key American parts to Chinese chipmaker Fujian Jinhua.

Emerging Markets

Brazilian stocks hit a record high and the real touched its strongest point against the dollar since May after far-right candidate Jair Bolsonaro won Sunday’s presidential election.

Turkey announced tax cuts on cars, white goods and furniture, raising doubts about the government’s promise of fiscal discipline.

Mexico’s GDP expanded 0.9% in the third quarter, helped by a pick up in services and agriculture. Compared to the same quarter a year earlier, the economy grew by 2.7%. However, Mexican assets fell sharply after the country’s new president AMLO cancelled a $13bn airport that is already under construction following a public referendum on the issue.

Bonds

The yield on the 30-year US Treasury bond hit 3.46%, its highest level since March 2014, following the publication of stronger-than-expected jobs and wages data. The yield on the 10-year Treasury bond rose back to 3.22%, while the two-year note rose to a yield of 2.91% - the highest level since mid-2008.

US credit spreads widened over October with investment-grade issues suffering the largest increase in spreads since February 2018. For junk bonds, credit spreads have widened even more, jumping from 326bps in early in October to 388 bps at the end of the month - the steepest increase since early 2016, when the market was hit by a tumbling oil price. The yield on the overall junk-bond market has moved above 7% for the first time since November 2016.