Global Markets Update Tuesday 4 June 2018

Posted on 04 Jun 2018

Global stocks were unsettled by news that Italy’s proposed coalition government appeared to have fallen apart, raising fears that new elections would turn into a referendum on Italy’s membership of the euro. While stocks fell and peripheral eurozone bonds fell, core bonds rallied. Spain’s government also fell.

Concerns of a global trade war escalated after the US imposed tariffs on steel and aluminium imports from the EU, Canada and Mexico with effect from 1 June.

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United Kingdom

The FTSE 100 slipped 1.0% over the two weeks.

The Bank of England indicated it expects the UK economy to rebound after a slow start to the year and that it still expects to raise rates gradually. However, Mark Carney also said a "disorderly" Brexit could delay rises in interest rates as the Bank would be obliged to act to shore up the economy.

UK inflation fell to 2.4% in April, its lowest level since March 2017 and down from a level of 2.5% in March.

Retail sales rebounded by 1.6% in April. Over the three months to the end of April, retail sales rose just 0.1%.

Barclays said it had been exploring a possible merger, with Standard Chartered one potential partner. Meanwhile, the high street woes continued, with shares in Dixons Carphone plunging after it issued a profit warning.

US

The S&P 500 rose 0.5% over the two-week period. High profile tech stocks, known as Fangs, outperformed on the belief that they were less exposed to a potential trade war.

Donald Trump cancelled his forthcoming summit with North Korea, but then said a meeting may be back on the cards. The Trump administration also imposed tariffs on steel and aluminium imports from its closest allies, including the EU, Canada and Mexico.

Minutes from the Fed’s latest rate-setting meeting suggested the central bank is willing to let inflation run above its target level of 2%, potentially resulting in fewer increases to interest rates

US first-quarter GDP growth was revised down to an annualised rate of 2.2% from an earlier estimate of 2.3%.

The US economy added a greater-than-expected 223,000 jobs in May, but April’s reading was revised down to 159,000 (previously 164,000). The unemployment rate fell to an 18-year low of 3.8% in May.

Average earnings rose 2.7% year-on-year in May, up from 2.6% in April.

The Fed’s preferred measure of inflation, the Core PCE index, held steady at 1.8% in April.

The ISM manufacturing purchasing managers’ index rose to 58.7 in May, up from 57.4 in April.

Europe

The Eurofirst 300 lost 2.2% over the fortnight. Banks were particularly badly hit amid concerns over their exposure to Italian government debt.

Italy looked set for a fresh set of elections after a proposed coalition between Italy’s anti-establishment Five Star Movement and the far-right League appeared to have collapsed after the country’s president blocked their proposed nomination of a Eurosceptic finance minister. The news led to a sharp sell-off in Italian bonds and stocks as investors feared that the election could turn into a referendum on Italy’s membership of the eurozone. The rout also spread to US and eurozone banks amid fears that they will suffer heavy losses on their holdings of Italian debt. At the last hour, Italy’s president approved the coalition government, which will be led by Giuseppe Conte.

Spain’s prime minister was forced to step down after calls for a no-confidence prompted by convictions of high-level officials in a graft case. The incumbent government was replaced by a minority socialist one, led by Pedro Sánchez.

Minutes of the ECB’s latest meeting indicated that policymakers believed the region’s expansion remained “broadly intact” but acknowledged that the uncertainty surrounding the economic outlook had “clearly increased”.

The IHS Markit eurozone composite purchasing managers’ index fell to a weaker-than-expected 54.1 in May, from 55.1 in April, and the lowest level in 18 months.

The European Commission’s economic sentiment indicator dipped slightly in April, although the reading was better than many had feared.  

Eurozone inflation jumped to 1.9% year-on-year in May, up sharply from 1.2% in April. Rising oil prices were blamed for the spike. Core inflation, which excludes food and energy, rose to 1.1% in May compared to 0.7% in April. French inflation jumped to a six-year high of 2.3% in May

Deutsche Bank, Germany’s largest lender by assets, tumbled on news that its US subsidiary has been added to a federal list of institutions with weaknesses serious enough to threaten their survival.

Japan

The Nikkei 225 fell 3.3% over the two-week period.

The Nikkei-Markit manufacturing purchasing managers’ index dipped to a seven-month low of 52.8 in May from 53.8 in April.

Japan’s retail sales grew a stronger-than-expected 1.6% year on year in April, up from 1% in March..

Pacific Basin

China’s official manufacturing purchasing managers’ index jumped to 51.9 in May, up from 51.4 in April. The Caixin-Markit China manufacturing purchasing managers’ index, which focuses on smaller and private companies, held steady at 51.1.

Emerging Markets

Turkey’s central bank defied President Erdogan’s desire to keep borrowing costs low and raised interest rates by 300bps to 16.5% to try to stem the steep decline in the lira. Signs that orthodox policies were gaining the upper hand were reinforced when the central bank announced a simplification of its monetary policy.

In Russia, the manufacturing purchasing managers’ index fell into contraction territory in May for the first time in two years.

Bonds

US Treasury yields fell steeply, registering their sharpest one-day fall since the Brexit vote, with the 10-year yield reaching 2.77% compared to a seven-year high of over 3.1% a week earlier, as the collapse in Italy’s government spurred demand for safe havens. However, stronger-than-expected employment data caused yields to rise back above 2.90% on 1 June, as investors anticipated further tightening would be needed.

The yield on the 10-year German Bund also plunged, falling as low as 0.28%, before closing the period at 0.38%.

The yield on the 10-year Italian sovereign bond jumped to almost 3.4% and the yield spread of Italian bonds over Germany rose to over 300bps, its highest level in more than four years. The Spanish risk premium also rose.

Commodities

Oil prices fell back below $80 a barrel after Opec and Russia pledged to increase oil production by up to 1 million barrels a day to fill the gap left by Iran and Venezuela.