Weekly Market Update (Wk 28)
Bond and equity markets rallied in tandem this week as weak economic data fueled expectations of monetary policy easing by central banks, and the US and China committed to resuming trade negotiations with the US postponing the threat of tariffs on a further $200bn worth of Chinese imports. However, as a taster of what is to come, the US proposed to place tariffs on an additional $4bn worth of European Union (EU) imports, on top of the $21bn proposed in April, in response to EU aircraft subsidies for Airbus. The additional goods include Scotch whisky, cheese, olives, and pasta. As of Friday, markets are currently on hold, awaiting the latest US non-farm payroll data to give a steer on interest rate policy, with expectations of 160,000 jobs created, year-on-year average earnings up 3.2% and an unemployment rate of 3.6%.
As of 12 pm London time on Friday, the US equity market is up 1.8% for the week, European equities are up 1.7%, UK equities up 2.0%, Japanese equities up 2.7% and Australian equities up 2.0%. The Emerging Markets are up 0.9% as a group, with Chinese equities having risen 1.1% and Latin American equities up 2.7%.
Continued weakness in leading economic indicators helped maintain a picture of a global economic slowdown. This in turn has increasingly raised expectations of interest cuts, and perhaps even the return of quantitative easing. On Monday the US ISM (Institute for Supply Management) Manufacturing Index fell to 51.7, the lowest level in more than 2 ? years, with 50 being the dividing line between expansion and contraction. On Friday, the latest data for German industrial orders pointed to a sharp slowdown, declining by 2.2% for the month of May, much worse than the 0.1% fall forecast. The latest comments from Mark Carney, governor of the Bank of England (BoE), laid the ground for the next BoE policy move being an interest rate cut rather than an increase, as he said, “a global trade war and a no-deal Brexit remain growing possibilities not certainties”. The UK’s composite PMI (Purchasing Managers’ Index) contracted in June, coming in at 49.7, indicating mild contraction.
Against this background, developed market bond yields continued to fall to fresh new lows in the near term (yields move inversely to prices), with 10-year US Treasuries touching 1.94%, a level last seen over 2 ? years ago. UK gilts plummeted to 0.68%, which is below the BoE’s base rate of 0.75%. German bunds hit yet another new record low, touching minus 0.407% on Thursday, now trading at minus 0.389%.
Another fillip for markets came in the nomination of Christine Laggard, current Managing Director of the IMF (International Monetary Fund) as the next president of the ECB (European Central Bank). Markets breathed a sigh of relief as she is viewed as an advocate of the outgoing president, Mario Draghi, on his stimulus policies, unlike the hawkish Jens Weidmann of the German Bundesbank.
The Australian share market strengthened considerably this week, up almost 2% as investors took stock of the latest interest rate cut by the central bank, the Reserve Bank of Australia (RBA). Main interest rates were cut by another 25bps to 1%, having already been cut in June as the RBA governor, Philip Lowe, explained the decision was to “support employment growth” and to generate “greater confidence” in the economy which had been growing at below trend in the March quarter.
The additional stimulus sent all equity sectors higher for the week, led by property trusts (+6.7%) and Information Technology (+4.2%). The major banks lagged as the latest interest rate cut further put pressure on their net interest rate margins. Meanwhile, the Australian dollar stayed relatively unchanged despite the looser monetary policy, only falling 5 basis points overall for the week to finish trading at US $0.702.