Market Review & Key Events
23rd November 2018
Markets have had another unsettled week, as a tense dialogue between Mike Pence, vice president of the United States, and Xi Jinping, president of China, at the Asia-Pacific Economic Co-operation summit, dimmed hopes of a trade deal being struck between the two nations at the upcoming G20 meeting in Argentina. US technology stocks came under further pressure, with Apple leading the way, following reports that production orders for all three iPhone models recently launched, have been cut. The oil price also came under further pressure, with Brent crude falling to $61 a barrel, a 9% fall on the week. And if this was not sufficient, the minutes from the European Central Bank’s (ECB) meeting on the 25th October were released, revealing that the central bank considers Europe’s recent weak economic data as a temporary blip, driven by a series of short-term factors. This is crucial as in December the ECB votes whether to halt its expansion of its bond buying quantitative easing programme.
Against this backdrop, the US S&P 500 index fell 3.2% over the week up to 12pm London time, with the technology dependent Nasdaq index falling 3.8%. China’s Shanghai Composite index fell 3.7%, although the broader emerging markets proved to be relatively defensive, falling 1.1%. The EuroStoxx 600 fell 1.2% and the UK’s FTSE All Share fell 0.7%. The Australian S&P/ASX 200 and Japanese Topix proved to be relatively defensive, falling 0.3% and remaining stable at 0.0% respectively.
Government bonds did rally, but insufficiently to counteract the equity selloff. The yield on 10-year US, UK and German government bonds all fell, with yields moving inversely to price, and currently trading at 3.06%, 1.38% and 0.35% respectively. Gold provided little shelter either, falling 0.1% over the week, with cash proving to be one of the few safe places to hide.
Economic news out of Europe on Friday added to the gloom, as purchasing managers indices (PMI), a leading indicator to strength in the economy, fell to their lowest level in over five years. The composite PMI, encapsulating both manufacturing and service sector activity, came in at 52.4, with any number above 50 indicating expansion. However, it is the trend that has concerned investors, having consistently fallen from a high of 58.8 in January.
Issues under discussion
The MSCI World index in US dollar terms is down 7% year to date, very close to correction territory. Consequently, valuations in many markets are looking much more attractive today, with emerging markets, Japan and the UK looking particularly interesting. There are also some tentative signs that US dollar strength is losing some of its momentum, which is positive for risk assets, as dollar strength sucks liquidity out of markets. However, despite this, to date we have not bought the dip, mindful that whilst wage inflation in the US continues to strengthen, that is likely to strengthen the US Federal Reserve’s hand in further interest rate rises. Until we see further evidence of the US dollar rolling over, likely due to interest rate expectations coming down as higher interest rates slow economic growth, or a reacceleration of growth elsewhere in the world, we will remain on the side lines for the moment.