Investments

Market Round-up 12-16 August 2019

Thomas Watts

The information in this blog or any response to comments should not be regarded as financial advice. If you are unsure of any of the terminology used you should seek financial advice. Remember that the value of investments can go down as well as up, and could be worth less than what was paid in. The information is based on our understanding in August 2019.

 

This week

Processing visual information is a pretty complex task, taking a relatively large portion of the brain’s computing power compared to the other senses. The brain is required to perform several tasks in order for us to see what is in front of us the correct way, including switching it the right side up. As an image comes through a convex lens, it is inverted, leading to the optic part of the brain having to flip it back round again so objects don’t seem upside down.

Economic

Without the trick the brain plays, an inverted image could be the stuff of nightmares, in the world of economics it certainly is. Wednesday saw global stocks sell off aggressively as recession fear gripped investors, with both the US and UK yield curves inverting for the first time in 12 years. All three major US indices lost around 3%, with the Dow Jones enduring its biggest one-day loss since October last year, after the yield on 2-year Treasury surpassed that of the 10-year, often a sign a recession is on the way. When short-term interest rates exceed longer-term rate expectations, market sentiment suggests the long-term outlook is worse and so yields offered by longer term debt will usually fall.

Economic data out of China and Germany this week was certainly a sight for sore eyes, suggesting a faltering global economy, already plagued by a lengthening trade war between the US and China. Tuesday saw Germany report a contraction, much like the UK had done in the previous week, in its second quarter GDP, worrying many that the Eurozone would soon fall into recession. The world’s second largest economy, China, also reported Industrial Production numbers way below forecast, 4.8% versus 6%, its lowest for 17 years.

Donald Trump

The week did start on a more positive footing as Donald Trump, who had been making more than a spectacle over the US’s trade war with China, threatening to increase tariffs on Chinese goods a few weeks ago, stepped back from the brink. Tuesday saw the US President soften his approach, putting off the 1st September deadline for a 10% increase in tariffs on goods such as mobile phones, laptops and other consumer goods in hopes of blunting their impact on the US Holiday season.

There were very few bright spots during what was a difficult week for markets. However, on domestic shores, UK Retail Sales remained surprisingly robust, growing 0.2%, confounding estimates of a 0.3% contraction. Department stores’ growth increased for the first time this year with a month-on-month growth of 1.6%; this was following six consecutive months of decline.

The week ahead

After a week in which it was announced that train fares would rise in line with inflation, causing many annual ticket prices to rise by more than £100, a Eurostar trip to Europe will allow us to see if prices are also creeping up on the continent.

Eurozone

Eurozone inflation data is released on Monday morning, detailing the change in the price of goods and services purchased by consumers. Consumer prices account for the majority of overall inflation and is an important metric when judging how a central bank may plot its future rate trajectory. The numbers are given added importance this week due to European Central Bank’s insistence that they can reintroduce yet more Quantitative Easing if required. Inflation in the Eurozone has been close to anaemic for a number of years now, however, last month’s reading did beat analysts’ forecast, making this month’s reading pivotal.

US Crude Oil Inventory

For those watching the commodity markets, Wednesday’s US Crude Oil Inventory numbers should prick some interest. As the ongoing trade war between the US and China drags on, Brent oil prices have slumped to below $60 a barrel, as investors worry about a potentially depleting level of global trade. The US keeps the majority of its oil in in a facility located in Cushing, Oklahoma, which is where the data will be coming from. Through measuring the change in the number of barrels held in storage by commercial firms, this data can be used as the primary way to gauge the supply/demand dynamic in the market and how changes in production levels have affected this balance.

As the week draws to a close, economists’ attention will stay in the US, but switch to Jackson Hole, Wyoming, for the Economic Policy Symposium. The event is attended by central bankers, finance ministers, academics, and financial market participants from around the world. US Federal Reserve Chair, Jerome Powell, is also due to deliver an address titled “Challenges for Monetary Policy” which could cause waves, especially in currency markets.