Global equity markets advanced with US equities once again achieving record highs.
Investor sentiment was largely driven by developments in China as the coronavirus outbreak spread.
- US and European equities began the week on a positive footing, with markets recovering from the sharp sell-off at the end of the previous week.
- But Chinese stocks suffered their worst trading day since 2015 on Monday as markets reopened following the extended lunar new year holiday. The CSI 300 index fell by almost 9.1% marking the worst opening in nearly 13 years, with the index eventually closing 7.9% lower and wiping $358bn off the value of shares; this was despite the central bank injecting Rmb1.2tn to provide liquidity to the markets and to provide a buffer against the impact of the coronavirus outbreak.
- Wider investor sentiment grew more buoyant as the week progressed, supported by further measures by the People’s Bank of China to support the economy from the impact of the epidemic, promising to inject a further Rmb500bn ($71bn) of liquidity into the financial system.
- In the US, the S&P 500 and Nasdaq Composite indices both closed at record highs on Thursday, following the announcement by China that it plans to halve tariffs on around $75bn of US imports as it begins to implement the ‘phase one’ trade deal with the US.
- However, ‘risk off’ sentiment returned at the end of the week as fears over the potential economic impact of the coronavirus resurfaced, causing US and European equities to retreat slightly after 4 days of consecutive gains. But despite Friday’s market falls the S&P 500 experienced its best week since June 2019, advancing 3.2%, whilst the Nasdaq Composite and the pan-European Stoxx 600 rose by more than 4% and 3.3% respectively, to record their best week since November 2018.
- Safe-haven assets rallied on Friday as fears resumed with the 10-year US Treasury yield falling 6.1bps to 1.5817%.
- Oil prices fell for the fifth consecutive week as the coronavirus continues to weigh on the outlook for the commodity, with Brent crude entering bear market territory as the price fell as low as $54.17. An ‘OPEC+’ technical panel has recommended a provisional cut in oil production of 600,000 barrels per day in response, in an effort to support prices.
- The People’s Bank of China lowered the cost of short-term loans from the central bank in order to provide support to the economy.
- Economic data releases for the week were broadly positive, strengthening the generally optimistic mood. But Europe detracted from this sentiment with German industrial output falling 3.5% in December (of which construction was down 8.7%), whilst in France industrial output slumped 2.8% in November, its second worst performance since the global financial crisis.
- European retail sales also disappointed falling 1.6% m/m in December and the annual growth rate declining by 1%.
- However, there was one positive note with the Eurozone composite PMI of business activity, a leading indicator, recording a five-month high of 51.3 in January – a score above 50 signifies expansion.
- UK manufacturing survey data posted a nine-month high in December with the Markit/CIPS manufacturing PMI improving from 47.5 to 50.0, supported by construction activity which had fallen at the slowest pace in eight months.
- The UK services sector also beat expectations as the PMI recorded its highest reading in 16 months in January, rising to 53.9.
- The US ISM manufacturing PMI rose to 50.9 in January as the sector moved out of contractionary territory for the first time in six months. The services sector activity also picked up, evidenced by the ISM non-manufacturing index increasing to 55.5 in January, the highest level since August.
- US employment surprised on the upside with non-farm payrolls increasing by 225,000 in January, ahead of the median forecast of 160,000, although the unemployment rate increased by 0.1% from its 50-year low of 3.5%.
- The US Treasury Department announced that it plans to issue new 20-year bonds again after a 34-year pause.
- Japan’s composite PMI expanded for the first time in four months, rising to 50.1 in January from 48.6 in December.
The Week Ahead
|Tuesday||UK GDP; UK industrial production|
|Wednesday||Europe industrial production|
|Friday||Europe GDP; US retail sales; US industrial production|
|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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