Duncan Donald

Mon, Dec 10

Weekly Markets Update - 10/12/2018

Last week showed notably increased volatility with risk assets in particular having a rough ride. After a positive start of the week following the US-China Trade War pause for a “grace period” (until 1st March 2019), the sentiment quickly switched with global equities being the hardest hit.

Within days of the 90-days “grace period” being agreed, Mr Trump (the self-proclaimed “Tariff Man”), felt he needed to warn China that if China failed to make good on the promises reached during the G-20 meeting, the US would impose additional tariffs on Chinese imports. This acted to reignite fears of a continuation of the trade war and thus a global slowdown.  The development with the detention of a Huawei executive on Canadian soil, suspected of trying to evade US trade curbs on Iran, will naturally strain the US-Sino relationship.

The US Beige Book report, issued by the US central bank, highlighted that the inflation rate has risen at a modest pace and that tariff-driven price increases have spread more broadly through the U.S economy. The report also highlighted that the economy is growing from modestly to moderately. Furthermore, the Federal Reserve Chairman, Jerome Powel has begun to indicate that the 3-year tightening cycle could be drawing to a close. Commentators are even beginning to cast doubt over the anticipated December rate hike, which took the market by surprise. Friday’s 25% miss on the Non-Farm Payroll numbers certainly acted to deepen the negative sentiment just starting to form over the US economy.

So, in a week shortened by President Bush’s funeral, the negative sentiment caused equities to lose all the gains recorded from the previous week, with the S&P falling from 2,821 to 2,625. The US 10-year Yield also fell well below the psychological 3% level, whilst the Dollar Index moved lower.

In the UK, the debate on the Brexit deal continues. The House of Commons found the PM May’s government in contempt of Parliament for not releasing its legal advice on Brexit, despite being instructed to do so by MPs.  It is not clear at this point what would be the repercussion of this decision on the members of the Government, but for sure this was a blow to the confidence of Theresa May. The all-important parliamentary vote on the PM’s Brexit deal comes on Tuesday, with 320 votes required to pass the withdrawal bill. At this time, it is estimated that she could fall short with just around 226 votes.  A late afternoon emergency statement to MPs from PM Theresa May confirmed the originally scheduled Tuesday 11th December vote has been delayed indefinitely.   The UK PMI data for November showed better than expected readings in Manufacturing and Construction, but with a worse than expected reading on Services. The Services PMI was reported at 50.4 relatively close to the 50 level, below which indicates contraction.

UK Equities, in-line with global equities recorded a negative week overall, with only a positive return on Friday, whilst the yield of the 10-year Gilt moved below the 1.30% level.  The Pound had a negative week against the US Dollar, breaking below 1.2700 but failing to break through the 1.2660 technical support level (before bouncing back to 1.2800). We opened the week trading around the 1.2730 area.

In Europe, Italian PM Conte has showed important willingness to tweak their budget in order to avoid the threat of EU sanctions, and it was indicated that he has been in contact with EC Head Jean-Claude Junker.  A meeting on Tuesday is scheduled to discuss a new budget and Italian bonds have rallied on the back of this news.  In Germany, Angela Merkel has stepped down from the leadership of the Christian Democrat party (CDU).  Ms Annegret Kramp-Karrenbauer, a Merkel protégé, has been elected as the future leader that would grant the continuation of the current party policy. In France, the political unrest continues as the Yellow Vest protests against the Macron government policies added to the pessimistic mood.

European equities followed the US and UK counterparts lower in one of the worst weeks in recent history. In a risk-off environment, the 10-year Bund yield settled at a new yearly low on Thursday at 0.235% but managed to move above 0.25% on Friday 7th December.

The week ahead will be influenced by the UK GDP and manufacturing production on Monday 10th December, with UK Unemployment rate and Parliament’s Brexit vote on Tuesday, then the European Central Bank (ECB) policy meeting on Thursday. Also this week, we have US and European CPI inflation, the Swiss National Bank monetary policy decision, and the week ending with US retail figures.