Market Update August 2019
Posted: 20th August 2019 | Share
By Sarah Ryman
In the words of Queen and David Bowie – We are “Under Pressure!”
Whether it’s the pound, the new Prime Minister, growth outlooks or general sentiment the economy appears to be under increasing pressure as we await our Halloween deadline.
The Great British Pound has taken further knocks this month and companies have switched a near-record amount of sterling deposits into foreign currency as part of contingency plans before a no-deal Brexit according to figures released by the Bank of England this month. It has also emerged that the government has built up a war chest to protect the pound with foreign currency reserves up by 25% over the past year.
The construction sector shrank for a third month in a row in July as Brexit worries hit building projects and concerns grew that the slowdown could infect other areas of the economy. Whilst the purchasing managers’ index (which is a monthly survey of 150 construction companies and generally regarded as a barometer for economic health) rose to 45.3 from 43.1 it is still below 50 reflecting contraction.
The UK economy contracted for the first time in seven years in the second quarter of 2019 with UK GDP shrinking by 0.2% according to the Office for National Statistics (ONS). Whilst the service sector provided a positive contribution to this figure, growth was only marginal in the sector which makes up over 70% of the UK economy. Meanwhile inflation overshot market expectation lowering the chances that the Bank of England will cut interest rates unless the country faces a no-deal Brexit.
On the upside, retail sales rose 3.3% year on year against 2.6% expected which helped boost morale and support the pound.
The export-driven German economy has contracted in the second quarter of 2019 according to data released this month due to weak global demand, trade tensions and Brexit negotiations all impacting exports. Fears of an imminent recession gripped trading floors with the Dow Jones experiencing its biggest one-day drop of 2019 as investors were spooked.
Prices in the Eurozone rose just 1% in July, official figures showed this month, which is far below the European Central Bank (ECB) target of 2% making it increasingly likely that the Bank will relaunch its bond buying programme next month. Portugal posted the lowest annual inflation reading of minus 0.7% whilst Germany only reached 1.1% against 1.5% the previous month.
The German central bank has warned that the country’s economy could already be in recession as the global slowdown and trade tensions take their toll.
Trade war tensions have not diminished over the past month with President Trump accusing China of currency manipulation. The US has however pulled back from its threat to slap 10% tariffs on around $300bn of Chinese goods saying it would not put tariffs on some of these products such as laptops and mobile phones. In addition the trade ban on Huawei that was due to come into force this month has been delayed by the US for a further 90 days.
Market sentiment is that US interest rate cuts remain on the horizon over the remainder of 2019 with the rising risk of a US recession. We saw the yield curves of the two- and ten-year US treasuries invert for the first time in 12 years following the news that the German economy had shrunk in the second quarter of the year. Such an occurrence could signal an upcoming recession; yield curves also inverted on UK bonds.
The safe haven precious metal has hit a six-year high this month as investors look for a home for their money amid protests in Hong Kong, a dovish Fed, Brexit challenges and general fears of a global downturn.
China’s industrial output slowed to a 17-year low in July as the trade war with the US seems to be taking a toll on the world’s second-largest economy. Whilst figures show that growth remains at an enviable 4.8% year on year, economists had been expecting a reading of nearer to 5.8% given that output had grown by 6.3% year on year the previous month.
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