Market Commentaries 2018
A draft agreement between the UK and the EU has laid out a transitional period between the 29th March 2019 and December 2020 which is intended to ease Britain's departure from the bloc. Brexit negotiators, Michel Barnier and David Davis, also announced that an agreement had been reached on the rights of EU citizens living in the UK and vice versa, but that the key issue of how to treat Northern Ireland's border was still to be addressed. The news of progress sent sterling higher against many developed economy currencies - around 0.9 per cent against the US dollar and 0.75 per cent against the euro. The rise in sterling has caused a drop of around 1 per cent for the FTSE 100, however, as the internationally focused index saw revenues earned abroad diminished from higher exchange rates. European bonds were being sold, sending yields firmly higher as certainty over Brexit increased and demand for less risky assets fell.
President Donald Trump has announced today, via Twitter, that he has fired Rex Tillerson as Secretary of State. The pair are believed to have disagreed over several foreign policies matters, including the Iran deal, which led Trump to hiring CIA director, Mike Pompeo, as Tillerson’s replacement, who he feels is more like-minded. Despite this news, US stocks opened higher in early trading. This is most likely down to the Consumer Price Index (CPI) data released today which showed that prices rose by 0.2% in February, in line with economists’ expectations. Unlike last month’s figure, which rattled markets, the data released today seemed to reassure US investors that the Federal Reserve would not need to be overly aggressive in raising interest rates this year.
Job growth in the US was the strongest in a year and a half in February, posting 313,000 new jobs for the month. Wage growth, on the other hand, advanced at a slower pace, up 2.6 per cent year-on-year compared to 2.8 per cent recorded in January. US markets are taking the news as a confirmation of economic strength with US equities opening into gains and less risky assets such as US government debt being sold as risk appetite increases. The largely positive economic data has also raised expectations that the US Federal Reserve will be more likely to hike interest rates as much as four times throughout the year, although the more muted wage growth figure has, so far, kept the US dollar from making much progress one way or the other against its peers.
The European Central Bank (ECB) has today ended its commitment to intervening in the event of disappointing economic growth and buying more bonds through its considerable quantitative easing (QE) programme. European interest rates were kept on hold, however. As the central bank signalled this change of stance regarding QE, the Euro rose strongly against peers, briefly, before letting go of the gains. European stock markets reacted positively to the news, taking the statement as a confirmation of European economic strength and leaving the broad Euro Stoxx 50 index up nearly 1 per cent. Meanwhile, less risky European government debt was being sold as risk appetite increased. In the same press release, ECB president, Mario Draghi, criticised President Donald Trump's recent decision to seek new trade tariffs on steel and aluminium imports to the US, underlining that unilateral decisions are dangerous for international relations.
Gary Cohn, President Trump's top economic adviser and ex-Goldman Sachs President, resigned from his post yesterday, stating that he would be accepting the role of President at Wall Street bank, JP Morgan. Cohn cited fundamental disagreement with Trump's recent move towards protectionist trade policy – namely the intent to introduce a 25 per cent tariff on steel imports – and that he would no longer be effective in his role due to this conflict. Cohn, who backed free trade principles, was seen by many as a counterbalance to Trump's protectionist agenda. Markets took the news negatively, with US indices letting go of the majority of gains made yesterday. Markets with more pronounced links with US steel trade such as China, Japan and South Korea finished trading lower. Today, global equity markets are mostly down on growing concern over the ramping up of a trade war between the US and its trade partners, whilst less risky government debt is being bought.
Angela Merkel has secured herself a fourth term as Germany’s Chancellor after a historic vote on Sunday evening. The vote saw the two largest parties in Germany, the CDU and SPD, voting 66% for another four year term for the grand coalition in Germany. With Europe’s most powerful leader back in control, markets can expect to see a little more stability coming from the European political stage in 2018. This sentiment has European markets set to find a little more stability in the coming months despite the Italian election and US protectionism causing some short term volatility across the European indexes.
President Donald Trump has said that the US will be implementing a 25 per cent tariff on imports of steel and aluminium in a move that is aimed at regenerating US industry. Implementing tariffs of this kind can be enacted by the President alone and does not need congressional approval. Such protectionism stands to hurt major exporters and trade partners of the US such as China, Canada, Japan and Europe who have been speaking out to say they will plan countermeasures to the planned tariffs, exacerbating fears of a 'trade war' with the US. Mainly industrial components of global stock markets were hit by the news overnight, with Japan's Nikkei 225 index falling 2.5 per cent as car makers were most affected. China's Hang Seng index was down around 1.5 per cent and the US's industrial Dow 30 index fell by over 1.6 per cent. Today, global markets are dipping further, with European stocks being hit the most.
US markets dipped lower today after newly appointed Federal Reserve Chair Jay Powell reaffirmed the US central bank's intended trajectory of gradual rate hikes this year. The US dollar also strengthened around 0.5% against notable peers following the statement and US Treasuries (government bonds) saw some selling as the securities become less attractive in a rising rates environment. Powell commented that, in his view, the US economic outlook has strengthened since December and that inflation could well advance towards the central bank's 2% target. This was supported by a separate release today showing US consumer confidence to be the highest since 2000, indicating a heating up of the economy. Considering that economic and inflationary prospects are rising, markets are perceiving increased chances of the Fed tightening monetary policy further than planned. This could spell four interest rate hikes this year as opposed to three.
After US stock markets fell around 4 per cent for a second day this week, global markets continued to experience increased volatility and finished another day down from record highs today. European markets were down between 1 and 2 per cent at the close of trading, with the US falling a little further into negative territory shortly after the open before regaining some losses from the previous day. This week's fall is believed by many to be a correction from valuations becoming too high, too quickly and was seemingly triggered by a string of stronger than expected economic data coming from the US. This in turn has heightened inflation expectations and caused central banks to adopt a more hawkish tone on the pace and extent of coming interest rate hikes. Whilst further volatility is expected, global growth remains robust and the fundamental outlook for the global economy is positive.
An inflation report today from the Bank of England (BoE) has surprised markets by striking a more hawkish tone than expected, increasing prospects of the pace and number of interest rate hikes this year. Citing a strong global economy, the Monetary Policy Committee unanimously agreed that inflation over the 2% target can no longer be accepted and that the central bank will have to react with more aggressive tightening of monetary policy. All eyes will now be fixed on the next interest rate hike decision due in May. Sterling has shot up in response to the news as prospects of a higher interest rate historically strengthen currency, up over 1% against a basket of developed market currencies. Markets are selling UK gilts as holding bonds in a rising rates environment becomes less attractive. Meanwhile, the FTSE 100 has sunk into losses of over 1%, in part due to the strengthening of Sterling which diminishes profits from abroad, but also following increased global volatility this week.
Global equity markets have come under pressure after US stock markets fell around 4 per cent by the end of trading yesterday. Japan and other Asian markets followed suit, leading European markets to open and remain around 2 per cent down today. Consequently, investors are modestly buying bonds and other safe-haven assets such as gold. The sell-off is largely being attributed to rising inflation expectations that are a result of strong global growth and rising wage inflation. This has raised expectations that central banks, particularly the US Federal Reserve, will hike interest rates at a faster pace throughout 2018. As well as this, after such a sustained bull market in global equities, and with historically low volatility, a short-term setback such as this was widely expected and comes as a relief to many who had worried the global rally was gathering too much momentum.
Job creation in the US has beaten expectations, with Non-farm payrolls rising by 200,000 over the consensus forecast of 180,000, whilst wage growth has risen 2.9% year on year. The pace of wage inflation has increased to the fastest rate since 2009, helping to reinforce the case for the three expected rate hikes from the Federal Reserve in 2018 and also raising the possibility of further hikes. US sovereign bonds are being sold as the news is digested as the prospect of higher than expected interest rates makes current yields from US treasuries less attractive. The US Dollar has, on the other hand, seen gains after steady declines throughout most of January. US equity markets, despite the positive jobs data, are set to see their worst week of trading since 2016 and are down again on the day.
Interest rates were left unchanged in the range of 1.25 percent to 1.50 percent at the US central bank’s January monetary policy meeting – the last with Janet Yellen as its chair. The committee was relatively upbeat on the outlook for economic growth and the prospects for inflation rising above their 2 percent target. This has contributed towards a rise in risk appetite leading investors to sell government bonds, as they look towards a March rate rise by Yellen’s successor, Jerome Powell, who is largely expected to maintain her cautious policy approach. This selling of government debt has led to bond yields rising in the UK, US and Germany, while the dollar was relatively flat, having recovered declines from earlier in the session ahead of the statement.
Following better than expected UK jobs data, Sterling has risen 1.44% against the US Dollar and 0.75% against the Euro throughout today's trading. The US Dollar has seen weakness in and of itself, magnifying the move upwards for the Pound in this currency pair, and bringing the exchange rate to $1.4204 for every £1 – the highest since June 2016. As the UK economy continues to be stronger than many expected following the Brexit referendum, a combination of robust jobs data, higher inflation and relatively weak wage inflation are all laying the ground for further interest rate hikes which historically leads to a strengthening of currency. As European stock markets are broadly positive today, the FTSE 100 index is down around 0.5% as a stronger currency diminishes the value of profits earned abroad that must be repatriated back to Sterling.
US politicians have managed to come to an agreement to re-open the government after a three day shut down. The stale mate was over a strong objection from the Democratic party to the “Dreamers” immigration policy, this led to the party blocking any raise to the funding requirements for the US government until concessions had been made on this piece of legislation. In Asian trading markets followed on from a strong lead in Wall street with the positivity expected to carry on in European trading as markets prepare to open.
The number of jobs created in the US over December came in at 148,000, missing analysts’ expectations of 190,000. Despite this, Novembers job creation figure was revised up to 252,000 which puts average job creation over the last quarter in the US at 204,000 and a total figure of 2.1m jobs created in 2017. Related employment figures shows the all-important wage inflation figure rising to 0.3% from November and 2.5% over this time last year. Markets focussed on the yearly employment figure as an indication the US economy is running close to full employment yet remained puzzled by the persistent lack of inflation. The dollar sold off on the announcement as markets began to cast doubt on three rate hikes for 2018.
After closing strongly last year global equity markets have continued to rally in the New Year with the broader US S&P 500 stock index (representing approximately 80% of the investible US equity market) making a new all-time high as it breached the physiological barrier of 25,000. Similarly, in Asia, Japan's TOPIX index hit a twenty-six year high following the release of positive manufacturing data. Optimism over the corporate tax cuts signed into law by President Donald Trump last month may have been a key driver for equity markets over recent weeks but strong underlying economic growth, both domestically in the US and internationally, combined with solid corporate earnings are also viewed as primary factors contributing to the rally.