Markets & Key Events

Sentiment turns positive despite widespread evidence of contraction in manufacturing sector

Market sentiment turned positive this week, despite data released at the start of the week which pointed towards wide spread contraction within the manufacturing sector, as a series of positive announcements turned investors perceptions.  The withdrawal of the contentious extradition bill in Hong Kong, hard Brexit risks seemingly receding, supportive service sector PMI (purchasing managers index) data and the resumption of trade talks between the US and China all helped to improve sentiment.  All eyes are now on the release of the US non-farm payrolls employment data due out this afternoon to gauge the impact of the trade war on the US economy and provide further clues as to the next move by the US Federal Reserve.

Equities markets rise over the week, whilst defensive assets give up some of their gains

As of 12pm London time, US equities over the week gained 1.7%, European equities rose 1.7%, Japanese equities rose 1.7%, Australian equities increased 0.7%, and even UK equities, in a rollercoaster week for UK politicians trying to reach a Brexit conclusion, climbed 0.8%, with more domestically exposed mid cap companies rising 1.3%.  Emerging markets rose 1.9%, of which the Hong Kong stock market rose 3.8% and mainland Chinese equities increased by 3.9%, with the latter boosted by the resumption of trade talks with the US and expectations for further stimulus from Beijing.

Against this background, defensive assets gave up a little ground over the week.  The 10-year US Treasury yield, which move inversely to price, rose to 1.58% as of Friday, as did UK gilts rising to a yield of 0.55%, and German bunds slightly less negative at minus 0.6%.  Gold fell over the week, now trading at $1,516 an ounce.

Manufacturing lead indicators point towards widespread contraction

The week began with a slew of poor data for the manufacturing sector released by the IHS Markit Purchasing manager’s indices, considered a reliable lead indicator as to company trading conditions.  The US Institute for Supply manager’s manufacturing index fell to 49.1 in August, crossing the line from expansionary territory into contraction.  UK factory activity shrank for the 4th month in a row, and at the fastest pace in seven years. There was weak data for Europe, China, Japan, South Korea and Taiwan, amongst others as the manufacturing sector contracted amid the trade war and weak domestic and global demand.  The US introduced tariffs of 15% on $112bn of Chinese imports this week and the Chinese retaliated by introducing tariffs on US goods, including crude oil.  To add to the gloom, Sterling fell below $1.20 for the first time since 2017 as Prime Minister Boris Johnson threatened to call a snap general election if parliament blocked the path to a no-deal Brexit.

Sentiment turns positive

However, the Caixin Markit Manufacturing PMI, a private survey tracking smaller companies in China, increased in August, as the sector grew for the first time since March, boosted by domestic demand.  Carrie Lam, Hong Kong’s chief executive, withdrew the extradition bill that started three months of protests.  Boris Johnson was defeated in the House of Commons as MP’s voted to block a no-deal Brexit and later failed in his attempt to call an early general election, leading to a sharp rally in Sterling back to $1.23.  The final icing on the cake for the week was the announcement of the resumption of US China trade talks in October.  US non-farm payrolls data is released this afternoon with market expectations for 160,000 net new jobs having been created and average earnings having increased by 3.0% year-on-year.

The information provided above is for Professional Advisers: All data has been sourced from Lipper. Any investment must be made in conjunction with reading the relevant KIID or Investment Mandate. Clients should be aware that the value of investments and the income from the may fall as well as rise and they may not get back the amount originally invested. Investors should note that the views expressed and information given were current at the time of publication but may no longer be so and/or may have been acted upon by the Investment Manager already. Source SmartIM