Market Update September 2019
Posted: 20th September 2019 | Share
As we approach the Jewish New Year it seems an opportune time to pause and reflect while being mindful of what the future holds. Brexit has been such a dominant part of global economics for what feels like an age but despite the looming Halloween deadline we don’t seem to be getting any further clarity.
At the beginning of the month figures released showed that Britain’s construction industry has suffered its sharpest drop in new orders since the depths of the recession a decade ago, with clients delaying projects as they await clarity over Brexit. Subsequently UK manufacturing suffered its worst slump in five years with business confidence in the sector at a record low and UK retail sales also fell.
Chancellor of the Exchequer Sajid Javid has promised a “decade of renewal” after years of austerity as he embarked on multibillion-pound spending spree, with extra cash for health, schools and the police. The new chancellor set out plans to increase spending by 4.1% or £13.8 billion next year, focussed on the “people’s priorities”. Westminster however remains in political chaos.
Mark Carney, the governor of the Bank of England (BoE) commented to the Treasury Select Committee that Britain’s economy will not be as badly damaged as feared by a worst-case scenario Brexit because of preparations made by several sectors. He said that Britain would still fall into a severe recession but GDP would contract by just 5.5%. The monetary policy committee unanimously voted to keep rates on hold at 0.75%.
Britain is on the cusp of recession for the first time in a decade as activity in services - which accounts for four fifths of output - slowed almost to a halt (50.6) in August according to figures released this month by HIS Markit. Official figures also showed UK inflation hit a three-year low in August. The BoE would normally be expected to cut rates if domestic inflation persisted below its 2% target and underlying economic growth was, as the BoE put it, only ‘slightly positive’. The Monetary Policy Committee said: “The longer those uncertainties persist, particularly in an environment of weaker global growth, the more likely it is that demand growth will remain below potential, increasing excess supply. In such an eventuality, domestically generated inflationary pressures would be reduced.”
The European Central Bank cut interest rates this month for the first time in three years and announced that they would restart their bond-buying programme known as quantitative easing (QE) which had been dormant since net purchases were ended at the end of 2018. The rate now stands at minus 0.5% and the purchase rate will be €20 billion a month from 1st November with comment from Mario Draghi that the possibility of further rate cuts is not inconceivable. He highlighted that governments now need to take action to support economic growth.
Italy’s new coalition plans to raise its budget deficit to around 2.3% of economic output next year could risk reigniting tensions with the EU. This figure is up on the current 2.04 and higher than the current 2020 goal of 2.1%; 2.4% is the level that almost triggered an EU disciplinary procedure against the country this year.
Demand for goods and services in the Eurozone fell at its fastest rate in six years this month according to HIS Markit’s Purchasing Managers’ Index (PMI).
The world interest rate probability of the Federal Reserve cutting interest rates by 25% in September was 100% prior to the announcement this month and proved to be correct. Low inflation, weaker growth prospects and ongoing trade tensions supported the move lower but sparked divide across the committee. The decision to cut for the second time this year now brings the federal fund target rate to between 1.75% and 2% which will lower the cost of borrowing in the world’s largest economy. Three policy makers dissented with two pushing to leave rates unchanged and one wanting a rate cut of 50 basis points. Trump was fairly scathing of the decision tweeting: “Jay Powell and the Federal Reserve Fail Again,” he continues to state that rates should be cut to zero.
China’s economy slowed further in August as current economic stimulus doesn’t seem to be having the desired impact quite yet. However the interactions between China and the US seem to have eased which is likely to have a positive impact.
Oil prices had their biggest daily gain in nearly three decades this month amid a dramatic escalation of tension in the Gulf following a series of drone strikes that took out half of Saudi Arabia’s crude production. The attacks took out five million barrels worth of production a day which equates to 5% of the world’s crude oil supply. While the US and Saudi Arabia are blaming Iran for the attacks, the UN’s envoy to Yemen - where Iranian-linked Houthi rebels have claimed they were behind the attacks - said responsibility was “not entirely clear”. Subsequently, following commitments for swift repairs (within weeks as opposed to the initial fear of months) prices eased back to around $65 a barrel.
May I take this opportunity to wish you all Shana Tova.
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