Global equities advanced for a second consecutive week as investor optimism was boosted by an announcement that the US and China will resume trade negotiations.
Sterling experienced a volatile week on the back of a frenetic period in the UK parliament.
- US equities advanced reaching a one-month high, paring back sharp losses earlier in the week, following the announcement that the US and China will resume trade negotiations. Ministerial level talks are planned for October.
- European equities advanced as political developments in the UK reduced the likelihood of the UK exiting the EU without a deal on the 31st October.
- Government bonds sold off sharply causing yields to increase; the German 30-year Bund yield re-entered positive territory for the first time in a number of weeks, before closing back below zero, as investor optimism improved on the latest trade developments.
- Corporate bond issuance set a new global record as companies raised $140bn taking advantage of low borrowing costs. US corporates led the way setting their own weekly record in raising $72bn. The cash raised is expected to be used to repay existing debt and extend the average maturity of bonds.
- The deepening political crisis in the UK heaped pressure upon sterling, which retreated to a three-year low of under $1.20 against the US dollar at the start of the week as the risks of a no-deal Brexit increased. However, sterling recovered strongly when Prime Minister Boris Johnson lost his majority in parliament, a bill to stop a no-deal Brexit passed into law (meaning that the government will be required to request an extension to the Brexit deadline if a deal has not been agreed by 19th October), and opposition parties agreed not to back Boris Johnson’s call for a snap election prior to the EU summit in mid-October.
- Global equity markets were boosted by developments in Hong Kong when chief executive Carrie Lam withdrew the extradition bill which had resulted in three-months of protests.
- Italian political concerns were eased, at least in the short-term, as the Five Star Movement and the Democratic Party reached an agreement to form a coalition government.
- After Argentina fell into technical default when the government failed to sell enough short-term bonds to raise the cash needed to meet upcoming repayments, the government introduced capital controls to stabilise the peso and prevent the debt crisis from spiraling. Argentina’s bonds and currency have been hit since President Mauricio Macri unexpectedly suffered a heavy defeat in primary elections, severely damaging his hopes for re-election in October.
- Divisions appeared within the US Federal Reserve as different arguments were presented for the recent inversion of the US yield curve, providing investors with a lack of direction over future policy decisions. Eric Rosengren, president of the Boston Fed, argued that the inversion was due to weakness abroad claiming there was less of a reason for concern at the bank, while the president of the Dallas Fed, Robert Kaplan, attributed the inversion to concerns over domestic growth, indicating a need to cut rates further.
- Weak economic data released in the US disappointed, providing a warning that the economy could be losing momentum. Jobs growth slowed in August with non-farm payrolls rising by just 130,000 whilst jobs growth in June and July was also revised downwards by a total of 20,000. The unemployment rate remained at 3.7%.
- The ISM US manufacturing data for August reported a contraction in the sector for the first time in three years, with the blame for the worsening outlook levelled at the prolonged trade war.
- Eurozone GDP halved to 0.2% in the second quarter with uncertainties over the outcome of Brexit and the ongoing trade war between the US and China weighing heavily on the region.
- The eurozone manufacturing PMI contracted for a seventh month as weak demand continued, although the figure of 47.0 was an improvement from July. The services PMI for the eurozone increased marginally in August.
- UK PMI data contracted in August reflecting continuing Brexit uncertainties. The manufacturing PMI fell to its weakest level in seven years and the services PMI at 50.6 only narrowly avoided falling into contractionary territory, thereby increasing the risk that the UK might fall into recession.
- China’s central bank confirmed it would cut the reserve requirement ratio for banks, increasing their lending ability by $126.4bn in order to increase the supply of credit and stimulate the economy given the protracted trade war with the US.
The Week Ahead
|Monday||UK industrial production; Japan GDP; China industrial production; China retail sales|
|Tuesday||UK average weekly earnings; UK unemployment rate; China CPI|
|Thursday||Europe ECB deposit rate; Europe industrial production; US CPI |
|Friday||US retail sales|
|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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