Global equities advanced ending a poor August on a positive note as the US-China trade rhetoric softened.
Global bonds continued to rally causing the US yield curve to invert further.
- US equities experienced their first weekly advance since July, and the biggest weekly gain since early June, as investors became optimistic of some progress in the US-China trade war.
- This may be premature as analysts are now predicting a reduction of 5.3% in the full year earnings expectations for companies in the US’ S&P 500 index, the most in three years, on the back of concerns over the general economic outlook including uncertainties created by the trade war with China.
- At the start of the week, the White House issued a statement confirming President Trump remains committed to the trade war with China, saying his earlier comments that he is having “second thoughts” on raising tariffs had been misinterpreted, and that his only regret was not raising tariffs higher.
- This resulted in US Treasuries staging a rally which caused the US yield curve to invert to its widest level since March 2007. The yield on 30-year Treasuries also reached a historic low of 1.907% and is now lower than the dividend yield of the S&P500 index.
- However, investor optimism was later boosted by unsubstantiated comments from President Trump saying China was requesting negotiations recommence, and Gao Feng, a spokesman for China’s commerce ministry claimed, “the most important thing at the moment is to create necessary conditions for both sides to continue negotiations”.
- Here in the UK, sterling fell by 0.4% against the US dollar on confirmation from the Privy Council that the Queen had approved Boris Johnson’s plan to effectively suspend parliament from the second week of September until October 14th, reducing the time available for lawmakers to attempt to block a no-deal Brexit.
- In Italy, Prime Minister Giuseppe Conte was given a fresh mandate to attempt to form a coalition government between the Five Star Movement and the Democratic Party, although the Five Star Movement was quick to warn that any agreement was yet to be finalised.
- The political uncertainty in Italy helped the Euro to fall on Friday to its lowest level against the US dollar in over two years.
- Oil ended its recent losing streak following a steep fall in US inventories by 10 million barrels last week far outweighing the expected reduction of just 2.1-million-barrels.
- US growth for the second quarter in 2019 was revised down marginally to 2%, broadly in-line with analysts’ expectations; however, consumer spending was stronger than anticipated at an annual rate of 4.7% in inflation- adjusted terms. US durable goods orders rose 2.1% in July, but this masked a fall of 0.4% when excluding civilian aircraft, vehicles and transportation equipment.
- Consumer confidence data in the US disappointed reflecting consumers becoming increasingly apprehensive of trade wars.
- In other trade news, it was confirmed that the US and Japan had “in principle” reached a trade deal which would lead to more US farm exports to Japan, resulting in President Trump dropping his threat of increasing tariffs on Japanese cars.
- Japanese data for July was mixed with industrial production rising 1.3% m/m, however retail sales missed expectations slowing to 2% y/y.
- In Europe, the autos sector was boosted by an announcement from China’s State Council that it is considering relaxing and removing restrictions on imported auto purchases in a bid to support consumption.
- Head of the Dutch central bank, Klaas Knot, told reporters he did not see a need for further QE in the Euro area adding that market expectations of monetary easing ahead of the September ECB policy meeting had been overdone.
- Eurozone economic sentiment in August improved slightly from July according to data from the European Commission.
- The US and France reached a compromise agreement on France’s proposed digital tax.
- UK consumer confidence fell to a six-year low in August on concerns over Brexit.
The Week Ahead
|Monday||UK PMI manufacturing; China PMI manufacturing|
|Tuesday||US ISM manufacturing|
|Wednesday||Europe retail sales; UK PMI services|
|Thursday||US ISM non-manufacturing|
|Friday||Europe GDP; US non-farm payrolls; US unemployment rate|
|FTSE All Share
|Dow Jones Industrial
|FTSE Eurofirst 300
|MSCI Asia ex Jap $
|MSCI EM $
|MSCI World $
|UK Gov 10 yr
|US Gov 10 yr
|German Gov 10 yr
|Japan Gov 10 yr
|Brent Crude ($/bbl)
|$ per £
|€ per £
|¥ per $
Source: FE Analytics, Financial Times, JP Morgan Asset Management
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