Duncan Donald

Wed, Aug 8

Weekly Markets Update - 08/08/2018

Last week was certainly a busy week with plenty of key economic events impacting the markets. The first of which was the Japanese Monetary policy meeting on Tuesday as they held interest rates and underlined commitment to the price target and forward guidance maintaining low rates for an extended period. This thwarted speculation that they were heading towards a rate hike which brought their currency under some short-term pressure.

Subsequently on Wednesday, the US Federal Reserve held their Monetary Policy meeting. With the US Economy buoyant in 2018 we have already seen hikes this year however, this meeting was not expected to provide a hike and that was proven correct with a unanimous vote to hold at 1.75-2% in line with expectation creating little movement in the markets. US employment data was also released on Friday with the Non-farm Payroll employment data falling short of expectation of an increase of 190k jobs, with just 153k. They did deliver a very positive revision of past months data and a slight improvement of the unemployment rate from 4% to 3.9%.

The “Big one” of the week was of course the UK Monetary Policy Committee (MPC) meeting on Thursday.  Mark Carney, Governor of the Bank of England and his committee members have been blunt in their forward guidance and general positivity of the economy. It was expected the from the 9 members that we would see a vote of at least 7-2 if favour of the first “real” hike from the UK MPC (The hike at the turn of the year was a reversal of the emergency Brexit vote cut). The underlining concern of Brexit did not hamper the committee members views and we saw a unanimous vote of 9-0 and a hike to 0.75%.  The initial move was as you would expect positive for the pound with the strength of the vote, but the move was limited for a few reasons, most notably the BoE had chosen to omit a medium-term view from their release which brings us back to the short/medium term concerns over Brexit, also in his follow up statements last week Carney expressed concerns over the short-term impacts of Brexit.  Despite this and more importantly for long term investors the BoE longer term rates expectation is for gradual hikes despite Brexit to normalise at around 2.5% in ten years’ time.

In the equities market as earning season in the US draws to a close we see US tech firms still driving and supporting the markets with Apple coming through their earnings well, finally surpassing the $1 Trillion mark.  The tech surge has continued to push US equities despite the continuation of the trade war with China, it’s worth noting that since the start of the trade war narrative Chinese stocks have lost a combined value of $6.17 Trillion whilst US stocks are slightly positive over the same period.

The Trade war situation continues to dominate the markets, we had a signal of positivity from Steven Mnuchin, the current US Secretary of the Treasury early last week stating that he was preparing to sit down with China to seek a resolution, however within 24 hours a Trump tweet had unwound that sentiment.  However, there is a glimmer of hope in the progress made by the EU v US dispute with a mutually satisfying deal being struck which hopefully this shows similar can be achieved for China and the NAFTA. 

We also saw the Reserve Bank of Australia leave interest rates on hold at 1.5% as expected and speak positively on the economy and in particular employment. The market was looking for comments on the impact of a downturn in China on the Australian economy to which they included the line “growth in China has slowed a little”. Finally, an announcement is expected from the Reserve Bank of New Zealand today where the interest rates are expected to remain at a low 1.75%.

In terms of data for this week the highlights will be Inflation data due out of the US and China. First up we see China on Thursday Forecast Month on Month (MoM) is expected at 0.2% versus -0.10. Year on Year (YoY) 2% versus 1.9% last month.  In the US the data comes on Friday, YoY is expected unchanged at 2.3%.  MoM unchanged at 0.2%. 

Finally we see the UK release of GDP on Friday with MoM forecast at 0.2% slightly lower than last months 0.3% and the Prelim quarter on quarter GDP forecast at 0.4% versus 0.2%.