MARKET UPDATE FEBRUARY 2020
By Sarah Ryman
BREXIT remains on the agenda with the focus on trade negotiations. The Prime Minister has reshuffled his cabinet with a new Chancellor of the Exchequer Rishi Sunak which in turn has increased expectations of more fiscal spending and less reliance on monetary easing.
The Bank of England (BoE) left interest rates unchanged at Governor Mark Carney’s last rate decision. The Central Bank highlighted signs of a short term pick-up in growth following the Tory election victory but slashed longer term growth forecasts as Brexit disruption and lacklustre productivity growth continue to impact the economy. Q4 GDP figures came out at 1.1% year on year which remains one of the slowest rates since 2008.
UK manufacturing rebounded in January to its best performance in nine months according to the HIS Markit/CIPS manufacturing purchasing managers’ index (PMI) which showed a steady 50 score and subsequently the flash PMI showed the fastest rise in manufacturers’ output in ten months. The services sector also picked up in January according to the same index of services activity which hit 53.9 – the best reading since September 2018. This is encouraging as services make up 80% of the UK economy. Whilst the probability of a rate cut over the coming months was very high, this has now come right back down supported by strong jobs figures confirming that UK unemployment is at a joint-lowest level of 3.8% (last seen in 1975).
Inflation rose to a six-month high of 1.8% in January which was a shock increase from December’s rate of 1.3% according to official data released this month. The reading remains below the 2% target but was higher than the 1.6% expected.
German industrial output suffered its sharpest fall in more than a decade in December - 3.5% - with the gloom surrounding the manufacturing sector showing no sign of relenting. Fears of a recession in the area are on the up as the Euro hits 33-month lows. Government bond yields remained steady at minus 0.4% which reflects a strong degree of caution and figures reported this month showed that Germany’s economy stagnated in the final quarter of last year.
The French Foreign minister Jean-Yves Le Drian has warned that talks between Britain and the EU over a future trade deal will turn nasty and no doubt trust will need to be restored to reach an agreement.
The US Federal Reserve left interest rates unchanged at the range of 1.5-1.75% as expected at the end of January, citing moderate US economic growth and a strong job market. Subsequently US employment surged adding 225,000 jobs in January according to non-farm payroll data released at the start of February. Unemployment now stands at 3.6% which is close to record lows and wage growth moved back above 3%. Probability of a rate cut seems to now be pushing into Q3 or Q4 with 65% chance of a cut forecast for September as the Fed looks to manage downside risks to the economy.
CHINA and Equities
Chinese stocks were off to a rocky start this month with fears over the impact of the Wuhan Coronavirus spreading to the financial markets. When markets reopened after the New Year break the CSI-300 index of Shanghai and Shenzhen listed stocks fell 7.9% which was the biggest fall since the Chinese market crisis of 2015. China’s central bank pumping £16 billion into the economy and cutting short term interest rates to boost liquidity seemed to do little to stabilise markets in the short term. Economists have also warned that China’s role at the heart of global supply chains is likely to have a knock-on effect across the world. By the end of February both the S&P500 and Nasdaq closed at record highs as optimism that China would take more measures to prop up its economy eased concerns about the economic impact of the coronavirus epidemic. Gains were lost shortly afterwards when a flurry of headlines highlighted that this challenge is ongoing. News that the virus had spread to Italy, South Korean cases had spiralled to nearly 800, confusion over the scale of an outbreak in Iran and Chinese Premier Xi Jinping admitting the outbreak would have a ‘relatively big impact on the economy’ led to further losses and the FTSE 100 suffered its worst day since 2016. We are now seeing gold pick up as supply chain concerns mount.
The World Trade Organisation (WTO) goods trade indication fell to reading of 95.5 this month down from 96.6 in November. A reading of 100 or above is a sign of medium term growth.
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