Market Commentaries 2018
UK Prime Minister, Theresa May has managed to secure a tentative Brexit proposal with her EU counterparts. The proposal includes the whole of the UK to remaining in a customs union to solve the issue of a hard boarder in Northern Ireland. The pound rallied over 1% against the dollar on the news but the stock market remains tentative to buy into the news because May has still to get the proposed deal through a highly polarised parliament which sees a dangerously high level of MP’s seeking to vote against the proposed deal.
Although the US Federal Reserve kept interest rates on hold in November, their comments implied that they remain on track to raise rates by a quarter point in December, as markets are predicting. The Fed seemed undeterred by recent market volatility as it put across a hawkish message, explaining that the current market environment is ideal to continue gradually raising interest rates. The US dollar, which had fallen slightly after the Democrat victory over the House of Representatives on Wednesday, regained some ground, while US and Asian equities fell.
US Mid-term elections saw the Republican party retain and increase control of the Senate. The Democrats made enough gains in the House of Representatives to take control of it which now spells a divided Congress. Whilst this outcome was expected and priced in by markets this status quo does spell uncertainty for the US President who will now struggle to get further policy reform through both the Senate and the House which in turn could mean Trumps remaining two years in office will be limited in terms of policy change for the US.
US payrolls in October rose to their highest rate since 2009 with the world’s largest economy putting on 250,000 jobs which came in way over analysts’ expectations of 190,000. Hourly earnings also rose to 3.1% which again is a figure not seen since the financial crash. These numbers have not only provided a boost the Republicans in next week’s election polls but essentially nailed on another US interest rate hike by the FED in December as well as markets pricing in the prospect of another four rate hikes in 2019. Question is, how long can the US keep this rate of growth up ?
US Q3 GDP surprised markets today by coming in at 3.5% above the markets 3.3% consensus. This positive news comes amidst October’s stock market correction which continues to roll across global markets. GDP Gains were driven mainly by buoyant US consumer spending which is now the strongest since late 2014. Whilst this GDP print was not as strong as the 4.2% GDP figure of Q2 this still puts the Republicans in the driving seat as we head into the US mid term elections in November which will prove a litmus test for how Donald Trump’s presidency is being received by the American people.
Global stocks continued on their downward trajectory, as a sharp sell-off in the US overnight, which pushed the S&P 500 index into negative territory for the year, moved many global indices closer to their worst monthly performance since the global financial crisis. US technology stocks were particularly hard-hit as weaker-than-expected earnings and heightened geopolitical uncertainty continued to impact large international companies. While markets are likely to remain volatile over the coming weeks, US earnings season is still underway which could surprise on the upside, while valuations for US and global equities have fallen to levels which are appearing more attractive from a risk/reward perspective.
The Federal Reserve on Thursday raised US interest rates for the third time this year to 2%. In contravention to president Trumps concerns about wanting lower rates, Fed president Jay Powell cited a strong economy, growth, and wages as unemployment continued to decrease as the reasoning behind the increase. He also laid the groundwork for another hike in Decembers meeting should the current growth path be sustained. Markets noted the absence of any reassurances that the Fed would remain accommodative in the face of any economic weakness indicating markets can expect the Fed to continue to raise rates to around the 3% mark before they look at slowing the pace of these rises.
Prime Minster May's hopes of a Brexit breakthrough at the EU summit in Salzburg were dashed yesterday as EU leaders threw out her Chequers proposal stating that it did not work. Given the supportive rhetoric coming from EU leaders in the weeks leading up to the summit, the UK premier believed her Chequers plan was going to be given a warm reception at Salzburg, but in reality, it was more of an ambush. The summit was intended to strengthen the Prime minister's authority in Westminster however this appears to have backfired once again which can only lead to more infighting in parliament.
US employment results for August surprised on the upside with a total of 201,000 new jobs created over the month, this was above analysts expectations of 190,000. The employment beat has firmly cemented the possibility of another US interest rate hike later on this month.
Whilst the jobs number did beat expectations it did not come as a huge surprise to markets and failed to move the dollar very much on the announcement. The surprise was the increase in hourly earnings which rose by 0.4 month on month which puts the yearly rate at a none year high of 2.9%. With the US economy starting to outstrip all of its developed market peers, investors have been left wondering how long this unchecked growth in the US can continue.
Mark Carney, the current Bank of England governor has announced he will be extending his tenure beyond 2020. The announcement headed off speculation surrounding his pre agreed exit in 2019 which had begun to cause uncertainty around the direction of the UK’s central bank after his departure. The announcement was welcomed by markets and investors alike, chiefly because Carney’s extension will be seen as a steady hand on the tiller of the central bank as the UK continues to negotiate itself through an increasingly uncertain Brexit deal with the EU.
Sterling volatility has continued this week as the pound again slipped against major currencies following negative remarks over the weekend from Theresa May and Michel Barnier, EU Chief negotiator. After last week's news that the UK and EU may be close to agreeing a deal, sterling had rallied against major currencies, with the pound rising past the exchange rate of $1.3 USD for the first time in nearly a month, consequently leading to underperformance of the internationally focused FTSE 100 index that suffers from a stronger currency. Today, however, these gains in sterling have deteriorated after Mr Barnier said he was strongly opposed to elements of the UK's current Brexit proposal, with Theresa May also commenting that there were lines that the UK would not cross despite recent progress in the negotiations. Today, the pound is down around 0.5% against major currencies and back below the $1.3 USD mark, whilst the FTSE 100 index is outperforming, aided by a weaker currency.
Non-farm payrolls increased by 157,000 for the month of July, which is significantly lower than the revised figure of 248,000 for June, and below analysts’ expectations of 190,000. Meanwhile, the unemployment rate edged lower to 3.9 per cent, versus 4 per cent for the previous month. The market did not seem to take the news as a signal that the Federal Reserve would be likely to alter their monetary policy plans for the remainder of the year, rather, if reinforced a picture of steady labour market growth in line with their outlook for gradual interest rate rises. The overall picture was positive, which helped the S&P 500 index hold on to its gains made over the course of the day. Meanwhile, investors were buying US government debt and selling the US dollar amid fresh tariff threats from China.
The Bank of England has taken the decision to raise the UK interest rate by a quarter of a percentage point to 0.75% from 0.50%. This 0.25% rise marks the highest interest rate level seen in the UK for nearly a decade. Whilst markets had largely priced in the hike, the unanimous vote to raise rates caught some investors off guard with level of commitment being shown to tighter financial conditions given the ongoing uncertainty surrounding the UK’s exit from the EU. Along with the rate hike the Bank of England also upgraded their longer term inflation forecast to above average and increased their GDP growth predictions for 2019. The upgrades to growth and inflation have sparked speculation that the Bank of England could be intending to raise rates faster than previously envisaged.
The European Central Bank (ECB) has kept interest rates on hold as expected in their latest policy meeting, indicating that they are likely to remain low until at least the summer of 2019. The bank also confirmed plans to end its quantitative easing program at the end of the year, as President Mario Draghi sounded an optimistic tone on the outlook for growth and inflation in the eurozone. The market reaction was fairly muted, as this outcome was expected, however the euro fell slightly against sterling and the dollar. European stocks continued to strengthen over the course of the day after President Trump and Jean-Claude Junker, President of the European Commission, agreed to work together to remove all tariffs, trade barriers and subsidies on non-auto industrial goods.
Inflationary pressure has held firm at 2.4 per cent in June, leaving sterling weaker by around 0.3 to 0.5 per cent against key currency peers as markets see lower chances of an August interest rate hike. Sterling, also hampered by the ongoing political disquiet surrounding Brexit, is now at its lowest against the US dollar since September of last year. Whilst higher energy and transport costs helped add to pressure to the consumer price index (CPI), the overall figure was detracted by falling food, clothing and recreation costs. With wage growth remaining muted and inflation flattening in June, low unemployment may not be enough to lead the Bank of England to hike interest rates at its next meeting. This has in turn made the pound less attractive, causing it to be sold, whilst UK government debt has become more attractive and thus was being bought today. The FTSE All Share, however, closed up around 0.6 per cent, aided by a weaker home currency.
The US has announced it will press ahead with a new round of $200 bn of trade tariffs aimed at Chinese goods, causing Beijing to threaten further retaliation. The tariffs would hit a wide range of industries, ranging from automotive components to food ingredients which are said to be facing additional levies of 10 per cent. Chinese equity markets fell between 1.5 and 2 per cent overnight, with European markets opening into losses of around 1 per cent. US futures are pointing to losses of around 1 per cent for US markets at the opening bell. Meanwhile, government debt is being bought as markets turn to safer assets amidst the heightened trade tensions. The US dollar, which has been strengthening throughout the escalating trade tensions, has made some gains against key currency peers today and is up between 0.1 and 0.3 per cent.
Home Secretary, Boris Johnson, has today resigned from his cabinet post, making him the third conservative party member to resign in the wake of Teresa May's government's latest Brexit proposal. Doubts are now being cast on the Prime Minister's ability to lead her party through the Brexit transition, though no serious challenger for her position has materialised at this time. Sterling has let go of gains made previously in the day and is now marginally down against key currencies such the US dollar and the euro. This has increased gains for UK equity markets as a weaker currency aids internationally focused FTSE companies, leaving the FTSE All Share up around 0.75 per cent for the day. Meanwhile, UK government debt has reversed a great deal of the day's earlier losses as investors seek safer assets in light of UK political unrest.
Just two days after Theresa May secured the backing of her whole Cabinet for a ‘softer Brexit’ plan, two key figures within her party have resigned due to concerns that May is keeping the UK tied too closely to the European Union (EU). David Davis had been leading UK negotiations to leave the EU, however decided that he was no longer the best person for the job, due to his conflicting views on the impact of a more moderate Brexit plan on the UK’s ability to negotiate in crunch talks. Divisions within the Conservative Party have surfaced once more at a crucial point in the Brexit negotiations, just eight months before the UK is due to leave the EU. Despite this, sterling has been strengthening on the back of the news of a ‘softer Brexit’, while yields on UK government debt are rising as investors sell debt.
US job figures have surprised to the upside today, with 213,00 new jobs being created in June over the consensus forecast of 195,000. Whist job numbers were strong, unemployment crept up 0.2 per cent and wage growth remained largely unchanged. On average, the US has now been adding 195,000 new jobs a month over the last twelve months, helping on the one hand to strengthen the case for the current interest rate hike trajectory employed by the Federal Reserve (Fed). Despite the number of new jobs, wage growth and unemployment are still lagging the Fed's 2018 forecasts and are tempering expectations of the Fed hiking rates again this year on the other hand. After today's release, the US dollar fell around 0.5 per cent against a basket of currency peers, while US government debt was being bought, both of which reflect lessened rate hike expectations. US equity markets have also rallied around 1 per cent in response as lower rates tend to be favourable for equities.
The pound has pushed higher against major currency pairs, such as the US Dollar, following the Bank of England's (BoE) decision today to keep interest rates on hold at 0.5 per cent. The rise comes as three out of nine members of the Monetary Policy Committee voted for a June hike, leading markets to believe the chances of an August hike of 0.25 per cent have now increased. The previous month, only two members had backed a rate hike. The BoE also says it could start shrinking its balance sheet once interest rates have been set around 1.5 per cent, down from the previously stated 2 per cent target, though the economic environment at the time will have to be considered. Despite the relatively vague display of intent to continue monetary policy tightening, the slightly more hawkish stance has seen the pound strengthen and UK government debt sell off to a degree. The rise of the pound has also sent the FTSE 100 lower as a stronger currency diminished foreign earners overseas revenue.
President Trump last night announced a further escalation in the ongoing trade war with China. The President directed a further $200 billion of Chinese imported goods to be earmarked for 10% import levy unless the Chinese government gave up its unfair trading practices in relation to the acquisition of US intellectual property. Markets believe that, ultimately, in this war of attrition the US has the upper hand due to its exhaustive list of Chinese imports totalling $505 billion last year. This is compared to only $130 billion in Chinese imports of US goods which makes this a much more painful exercise for China than the US. Markets have predictably taken the news badly as any escalation in a trade war threatens to derail the fragile global recovery.
Yesterday the US Federal Reserve (Fed) raised interest rates by 0.25 per cent, once again, as expected. Rates are now at 2 per cent, with the head of the Fed indicating that they intend to raise them twice more before the end of the year. The tighter policy and hawkish rhetoric reflects expectations of continuing economic momentum and a US economy that remains in 'good shape'. Contrastingly, the European Central Bank (ECB) today indicated they would hold interest rates at the current levels through the summer of 2019. They did, however, suggest that they would begin to taper off their program of quantitative easing (QE) beginning in September and ending in December. Moreover, they revised their inflation predictions up, whilst lowering their GDP forecast. In reacting to this announcement, the euro fell against its peers by over 1 per cent, while European stocks rallied.
US inflation figures were released today, the highest in six years at 2.8 per cent. The new height in inflation can be attributed to the increase in oil prices, which are now at $76 USD a barrel. This news comes ahead of the US Federal Reserve (Fed) announcement tomorrow on interest rates, which is now looking more likely given the higher than expected inflation figure. At the same time, in Singapore there has been an apparent success with the policy of peace brokering employed by President Trump with North Korea. Following this news there was a mixed reaction from European markets, with US equity markets opening positively.
223,000 new jobs were added to US nonfarm payrolls in May, beating consensus forecasts of 188,000 and well above last April's final 159,000 figure. Strength in the job market was underscored by unemployment falling 0.1 per cent to 3.8 per cent, the lowest level since early 2000, and with wage growth rising 0.1 per cent to year on year to 2.7 per cent. US government debt has seen light selling in wake of the news while US equity markets opened into gains. The day has also been marked by a relief rally in global equity markets after Italy formed a government, easing fears of second election that might have strengthened eurosceptic forces within government. In a busy week for political and geopolitical news, markets appear, for now, relatively unfazed by Spain's Prime Minister, Mariano Rajoy, being ousted today from his long standing position due to corruption allegations and the heating up of international trade tensions with the US.
The US has shot the opening salvo in a potential trade war with its economic and military allies by levying 25 and 10 percent tariffs on steel and aluminium imports from Canada, Mexico and the EU. Predictably all three trading partners have announced retaliatory tariffs on US imported goods from Harley Davidson’s to peanut butter. The escalation from the White House came off the back of US commerce secretary Wilber Ross’s comments that negotiations with the trade partners on tariffs had gone nowhere. This development will undoubtedly spell a further bout of uncertainty and market volatility exacerbated by the ongoing political uncertainty in Italy.
A new Italian coalition agreement has been announced today, binding the alternative Five-Star Movement and far-right League parties into forming a government. Whilst details of the agreement have been announced, and with fewer controversial elements than might have been expected, a Prime Minister is yet to be announced. Agreed policies focus on internal tax reform and plans to seek stronger EU immigration policy input, though no mention was given to seeking the cancellation of ECB debt or plans for a referendum or exit from the Euro. Market reaction has been largely limited to Italy, with Italian financials stocks taking the largest hit and Italian government debt selling off. The FTSE MIB (Italy's primary stock index) is down around 1 per cent, whilst the wider Eurostoxx 50, the broad measure of European stocks, is up marginally as details of the deal were less extreme than some might have feared. European government debt is being bought, further underlining the contrast.
The Bank of England (BoE) has opted to keep UK interest rates at 0.5 per cent, with members of the Monetary Policy Committee (MPC) voting seven-to-two against a rise. Disappointing economic data for the first quarter of 2018 is ensuring the MPC holds off on the first of the remaining hikes expected up to 2021. Despite the decision to hold and deteriorating economic assessment from the Office for National Statistics, the BoE cited bad weather as the main culprit for poor performance. Their projections for inflation were also lower than in February, and taken with the decision to hold, expectations that the BoE will hike as planned are weakening. After the announcement, sterling took a turn downwards against major currencies, falling around 0.7 per cent against the US dollar, whilst UK government debt was bought. The FTSE 100 received a boost from the falling currency and rose to around 0.2 per cent gain for the day, with the wider FTSE All Share also seeing a modest gain.
On Tuesday, President Donald Trump pulled the United States out of the Iran nuclear deal which was first struck by Trumps predecessor President Obama in 2015. Trump announced he believed Iran was lying about its nuclear development plans and as such would be imposing the highest level of economic sanctions on Iran. Analysts predict this will be aimed at Iran’s oil exports which have only recently become competitive on the global stage, unsurprisingly this announcement caused the price of crude to spike at $75 per barrel. Despite European leaders vowing to uphold the agreement with Iran this development could throw the Middle East into further conflict and further uncertainty.
US job creation has come in under the forecast of 192,000 with 164,000 new jobs created in April, whilst average hourly earnings have also come in slightly under forecast, growing 0.1 per cent month-on month and 2.6 per cent year-on-year. Despite the news, the US dollar has continued to rally against a basket of peers, leaving the US dollar index around 2018 highs and showing that markets are not taking today's disappointing job numbers as a sign that the Federal Reserve will alter its expected pace and extent of interest rate hikes. The UK FTSE index remains strongly up for the day, with the FTSE 100 buoyed by a fall in sterling versus the US dollar, a factor that inflates revenue earned abroad by international focused companies. Europe is positive, whilst US markets have also opened into modest gains in early trading, though markets continue to buy US government debt due to the attractive yield still on offer.
The UK economy grew at the slowest pace since 2012 in the first quarter of 2018, rising only 0.1% in three months. Reduced activity in the construction sector which contracted by 3.3% quarter-on-quarter was a leading factor, though adverse weather was also blamed for poor economic performance. Aside from this, the Office for National Statistics (ONS) also pointed to weaker manufacturing growth and consumer facing industries for slow overall economic growth. Sterling took a hard hit after the news, falling around 0.9 per cent against major currencies and UK government bonds were being bought as expectations of an interest rate hike at the Bank of England's next meeting fell significantly. The FTSE 100 index, comprised of internationally focused companies, was up around 0.7 per cent as the weaker currency improved earnings from abroad.
Mario Draghi, president of the European Central Bank (ECB), has today told press that, despite being 'cautious' following weaker economic data in 2018 compared to 2017, there was confidence in continued strength in the euro area and that inflation will likely rise and stay near the 2% target. Interest rates, as widely expected for now, have been kept on hold, however, and no end to the partially tapered quantitative easing (QE) programme was announced. Additionally, a strengthening euro currency was not discussed which has been creating a headwind for the economy maintaining the same level of momentum as 2017. Shortly after the comments, the euro fell against major currency peers whilst European government bonds were being bought. Despite this move into less risky government debt, European equities continued to remain strongly up for the day, suggesting the move towards bonds might be based on easing expectations of the ECB tightening monetary policy in the near future.
Yesterday the House of Lords voted 348 to 225 to re-view the proposed breakaway from the EU customs union after Brexit. Whilst largely expected the number of votes in favour of this course of action from the House of Lords took many by surprise. The vote ensures the Prime Minster will have to reopen the issue of a soft customs union with the EU. This is in contrast to her earlier instance that a union could not exist in a clean Brexit. This vote will undoubtedly throw the issue of a hard boarder with Ireland back into the spotlight. Whilst markets have reacted positively to the prospect of a softer Brexit, the step backwards in British policy spells the potential for further volatility for both UK stocks and the pound in 2018.
In the early hours of Saturday morning, British, French and US forces launched air strikes against the Assad regime in Syria. The chosen targets were facilities where the regime manufactured and stockpiled chemical weapons. Whilst the destruction of the facilities appeared to be a single strike, the coalition stated they would be prepared to step into the conflict once again if the use of chemical weapons continued. Russia, whilst vocal with threats of intervention ahead of the strikes, has not yet put any retaliatory action into place. Overseas markets on Monday appeared to have taken the strikes as a single act with no indication of further escalation with both Japanese and Australian markets moving higher and the price of oil retreating.
US Job growth has slowed to around a third of the previous month in March, with 103,000 new jobs being created compared to 326,000 in February. Unemployment held steady at 4.1 per cent, whilst year-on-year wage growth came in at 2.7 per cent. After such a high number of jobs created in February, the Financial Times measured consensus expectations for March at around 150,000, but today's figure has fallen significantly short of this, in part due to US construction and retail sectors shedding workers. More importantly, wage growth has failed to surprise to the upside, leading to Federal Reserve chief, Jay Powell, to comment that there is no reason to expect accelerating inflation quite yet based on the releases, signalling a more dovish tone. Equity markets have been relatively unphased by the news, though the failure of wage growth to pick up more strongly has led to US government debt being bought as markets temper expectations of the pace and extent of interest rate hikes for 2018.
Trade tensions between the US and China and worries over tightening regulation for large tech companies such as Facebook have contributed to Wall Street largely reversing its bold rebound on Monday. Tech related worries are being exacerbated by rumours the US is planning investment restriction for Chinese companies investing in US companies, whilst Facebook founder, Mark Zuckerberg, is reportedly willing to testify to the US Congress regarding the recent data privacy scandal. The US's tech-focused Nasdaq index fell almost 3 per cent throughout trading yesterday, whilst the wider S&P 500 fell around 1.7 per cent. Asian equity markets have followed the US down overnight and European markets have opened into selling today. As markets sold equities, they sought safer assets such as government debt, causing the US 10-year Treasury yield to fall to its lowest in seven weeks as prices rose. Today, this sentiment is also being reflected in European bond markets.
US President Donald Trump has announced yesterday that he plans to hit China with around $60bn in trade tariffs, sparking worries over an escalating trade war being threatened by the US. Following plans to impose tariffs on steel and aluminium imports to the US from any country, the latest announcement is, this time, specifically aimed at China, causing China to indicate it will take retaliatory measures should the plans go ahead. Asian stock markets were hit particularly hard by the news, with Japan's Nikkei 225 index falling around 4.5 per cent overnight, while China's stock markets fell around 2.5-3.5 per cent. Meanwhile, US markets had fallen around 2.5 per cent. Conversely, investors sought safer assets, causing developed market government debt to rally, whilst the Japanese Yen, often treated as a safe haven currency, rose markedly against the US dollar. Today, global markets are following a similar pattern, with European stocks opening down, whilst government debt rallies.
The US Federal Reserve has raised the target range for its benchmark interest rate by a quarter point, to a range of 1.5 per cent to 1.75 per cent, as was expected, in their most recent meeting. Their arguments for raising rates were that the US jobs market continues to be strong and economic activity is rising at a ‘moderate’ rate. However, markets were more focused on the fact that the Fed did not make any indication of a fourth rate rise this year, instead, sticking with forecasts of three rises in 2018. This led to the dollar weakening, along with US stocks, while US government debt was in demand, causing the 10-year yield to fall.
Reaching its fastest pace in nearly two and a half years, UK wage growth rose by 2.6 per cent compared to the same time last year in January, whilst unemployment has fallen to 4.3 per cent – the lowest since the mid-seventies. The improving economic data, though in line with expectations, is reinforcing expectations that the Bank of England (BoE) will press ahead with interest rate hikes throughout the year, the next being anticipated for May. Whist the news of stronger wage growth is good news, it is still not managing to outpace inflation which has tempered reaction to the release. Sterling strengthened around 0.5 per cent against the US dollar following the news, however, as prospects of a higher rate of interest historically leads to home currency becoming more attractive. The FTSE 100 index, comprised of mainly international earners, fell around 0.5 per cent as the strong currency eroded profits earned abroad, whilst UK government debt was being sold.
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.