Duncan Donald

Mon, Jul 1

KYLIN TALK | Weekly Markets Update 01.07.19

In the UK, this week has been pretty much all about the release of the Q1 account. In this way, annual GDP growth went up 1.8% on a year-to-year basis, while 1.4% sequentially. The services sector contributed the most to the output growth, along with an unexpected growth of 1.9% in manufacturing output. On the contrary, net trade contributed negatively, while household expenditure, government consumption and investment also lifted GDP up.

In the race for the vacant Prime Ministers role both contenders Boris Johnson and Jeremy Hunt are stepping up their campaigns. The pair have been underlining their willingness to pull the UK out of the EU on the 31st October with no deal if the EU fails to negotiate to an acceptable level. On the face of it this looks like tough talk to warn the EU that movement on the fine details of the divorce is required, but they are also both seeking to appease the rising following of the Brexit parties across the UK as they head towards the wider party vote.  

From a markets’ perspective, volatility and uncertainty have been key for last week. G20 developments (including tariffs talks), tensions in the Middle East, Chicago PMI contraction amongst the top market movers for this week. As a result, the VIX, which indicates the implied volatility of the S&P 500 edged up 8.5%, while Gold kept rallying for further 160bps. On the same note, Oil prices also went up 3.3% this week, recording a 2-weeks appreciation of almost 13%. Bank of America recently published a very interesting report saying institutional investors, mainly hedge funds and mutual funds, currently own the lowest exposure to equities since the financial crisis. Might this be a symptom of bearishness? Most certainly, “the street” expects a soon(ish) price correction, as Federal Reserve interest rate cuts have already priced in the current US Stock market valuation. The S&P 500 had been up 17% on a year-to-date basis, combined to global debt and derivatives flow at an all-time high feed the scepticism around the central bank's effectiveness to keep driving markets up for longer. So far, we have seen the longest-lasting bullish cycle over the past few decades, but as history teaches the market will eventually bear a price correction and this time might be deeper than last December global sell-off.

Following on from the weekends G-20 meeting the markets have opened positively as news of a truce between the US and China regarding additional tariffs. Whilst details of the agreement remain relatively vague, the tone of both parties’ comments have given the markets the assurance required and the “at least it didn’t go badly” rally has ensued with Asian stocks and the Yuan gaining on the open with risk currencies trading negatively. For now, it looks like things are going in the right direction, but comments from Trump centred on the fact the US are winning the trade war will certainly not help. It's quite evident he is using these negotiations to boost his popularity ahead of next years US elections as he seeks to play the knight in shining armour.  But for now, the market will enjoy the positivity of the weekend's progress.  


The week ahead:


Monday – Unemployment rate data from the Eurozone and UK Manufacturing PMI’s from the UK in the morning. In the US session, we receive the US ISM Manufacturing PMI’s

Tuesdays – First up is the Australian interest rate decision where it is expected we see a rate cut from 1.25% to 1%. Industrial producer prices in the Eurozone come in the morning before we hear from the RBS’s Lowe in the evening.

Wednesday – Eurozone first release quarterly sectoral accounts. UK Services PMI comes in the morning. U.S. International Trade in Goods and Services, May 2019 as well as ADP employment and Non-manufacturing PMI in the US session.

Thursday- A quiet day with Retail sales from Australia is first up followed by Eurozone Retail Sales.

Friday - Quarterly balance of payments Q1/2019 in the Eurozone. UK productivity: January to March 2019. In the afternoon it's US employment data where the market looks for an improvement on last month’s 75K employment number forecasting 164K, with also a small boost to average earnings from 0.2% to 0.3%.