Markets and key events | 8th March 2019

Equity markets give back some of this year’s returns

Equity markets gave back some of their returns for the year this week, as investors continued to wait for further news on US/China trade negotiations.  A growing sense of unease was not helped by the European Central Bank resurrecting a crisis era stimulus policy, in the form of cheap lending to Eurozone banks, against the backdrop of slowing economic growth.  This was followed up on Friday by China announcing its steepest decline in exports for three years.

As of 12pm London time, the US S&P 500 index was down 2.0%, the technology focused Nasdaq index fell 2.3%, Eurostoxx 600 index declined 0.9%, Japanese Topix fell 2.7% and Emerging Markets fell 0.8%, whilst the Australian S&P/ASX 200 bucked the trend, rising 0.2%.  The UK’s FTSE All Share index fell 0.5%, masking a fall of 2.1% in the more domestically focused FTSE 250 index against continued uncertainty in the Brexit negotiations as the deadline draws ever closer.

Against this, safe government bonds rallied, with 10-year US Treasuries now yielding 2.63%, UK Gilts 1.19% and German Bunds 0.06%.

US ISM non-manufacturing index surprises to the upside

Despite the weakness in markets, data out of the US at the start of the week actually surprised to the upside.  The ISM (Institute for Supply Management) non-manufacturing index rose to 59.7, up from 56.7 in January, higher than forecasted.  Any number above 50 indicates expansion.  This helped to confirm that the weakness in January was largely a result of the US government shutdown, rather than anything else more sinister, and aided a rally in the US dollar index, which rose 1.0% over the week against a basket of internationally traded currencies.

The latest non-farm payrolls number is due out today, with an expectation of 180,000 new jobs having been created in February, versus 304,000 in January. Average earnings are forecast to have risen by 3.3% over the year, and the unemployment rate to have fallen by 0.1% to 3.9%.

Draghi looks to join an exclusive club of central bankers never to have raised interest rates

Mario Draghi, president of the ECB, looks set to join a club of only a handful of central bankers never to have raised interest rates in the modern era, despite having been in the job for eight years.  The ECB this week felt it necessary to reintroduce so called “targeted long-term refinancing operations” (TLTRO), which acts as cheap financing for banks, as growth continues to falter in the Eurozone.  It also signalled that interest rates would not rise in 2019, having previously been expected to rise in the summer.  On Friday, data out of Germany showed the steepest decline in industrial orders for seven months, adding to investors unease.

China cuts GDP growth target

In a week where data highlighted weakness in China’s export markets, China also announced a lowering of their target GDP growth rate down to between 6% to 6.5%, from around 6.5% a year ago.  The Chinese premier, Li Keqiang also confirmed a series of tax cuts designed to boost domestic economic growth.

Canadian central bank turns increasingly dovish

As expected, the Canadian central bank held interest rates at 1.75%, a 10-year high. However, it also reversed its previous hawkish stance, citing the slowdown in global economic growth, giving it reason to rethink its prior case for further monetary tightening.

Australian equities buck the trend

The Australian market was one of the few bright spots in the Asia Pacific region. The market initially rose mid-week as investors priced in looser monetary policy from the central bank. Despite the main interest rate remaining at 1.50%, National Australia Bank (NAB) is now the second major bank (after Westpac) to predict the Reserve Bank of Australia (RBA) will cut interest rates.

The change in perception comes amid economic data that showed the Australian economy still expanding, albeit at a slower pace. Although the economy is in its 28th year of expansion, annual GDP growth came in at 2.3%, below trend and this is the slowest rate since mid-2017. The continuing decline in property prices, along with weaker consumer sentiment has led to fears the economy could go into reverse.

The Australian market declined at the end of the week, after China’s weak trade data. The Financial and Energy sectors were the worst performers, falling 1.6% and 1.5% respectively on Friday alone.

In other news

Winning a global trade war is rarely a simple process

This week it was revealed that the US trade deficit blew out to its widest level in a decade, rising to $612bn, an increase of 12.5% over the year, as an expansion in US exports of 6.3% was surpassed by a rise in imports of 7.5%.  This follows a year in which President Trump significantly accelerated the global trade war.  The deficit in goods was the largest on record at $891bn, with China accounting for nearly half of the total, with an increase of $43.6bn over the year to $419.2bn.

This goes to show that winning a global trade war through the use of trade tariffs is not quite as straight forward as President Trump might have hoped.

The strength in the US economy versus other economies has been a significant contributing factor to the rising imbalances, as US consumers have continued to buy from overseas, despite the increased prices.  On the other hand, retaliatory tariffs on US goods have more acutely impacted the demand for US goods from struggling foreign counterparts.  Agricultural exports have been hit particularly hard, with US soya bean exports dropping by 20%, to $17.1bn, the lowest level in nine years, following China increasing duties last July.

The strength in the US dollar has also been a contributing factor, making imported goods cheaper in the US and American exports more expensive.  US companies have also brought forward their purchases of Chinese goods to avoid being hit by higher tariffs in the future.

However, the Trump administration argue that the policy will bear fruit in the future and will help to improve the trade balance.  They also point to the growth in US manufacturing jobs as a signal that there has been an industrial renaissance during Trump’s presidency.

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