Market round-up 29-2 August 2019

Andrew Triggs

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.



The week that was

In a week which saw the start of England’s bid to regain the Ashes, it was investor hopes of the start of a prolonged rate cutting cycle in the US that were hit for six.

With global markets moving sideways during the early part of the week, all eyes were on the US Federal Reserve as investors anticipated the country’s first rate cut since 2008. However, investors were left stumped, as what many had hoped would be the beginning of a more dovish central bank was branded as just a “mid-cycle adjustment to policy” by Fed Chair, Jerome Powell. The Fed still cut rates by 0.25%, but following on from his initial statements, Powell attempted to clarify his position, saying that the central bank would not be committing to just one rate cut or “a long series of cuts” in the future, only serving to confuse investors further. The previous day, traders had forecast a 35% chance of three cuts by the end of year; after Mr. Powell’s words that likelihood had fallen to just 12%.

One man who struck a particularly frustrated tone was US President Donald Trump, who angrily tweeted: “As usual, Powell let us down.”

On the news of the Fed’s indecision, the US dollar rose to a two-year peak against the euro and accelerated against the yen during Asian trading.

Donald Trump wasn’t done there, however. Bowling something of an unexpected googly to markets, Thursday saw the US President vow to impose a further 10% tariff on $300bn of Chinese imports by September, sharply escalating a bruising trade battle which still shows no sign of ending. “I think President Xi…wants to make a deal, but frankly, he’s not going fast enough.” In response, markets already on the canvas from the US Federal Reserve a few days previous saw further panic, with the FTSE 100 dropping another 1.8% and the Eurostoxx 50 tumbling 2.3% on Friday morning.

Whilst the US dollar made its way higher during the week, sterling endured yet more sharp falls. The beginning of the week saw the pound’s steepest fall in eight months as new PM, Boris Johnson, promised that he would take the UK out of the EU “no matter what”, leaving sterling to drift along $1.21 for the majority of the week. To further compound the domestic currency’s woes, Thursday saw the Bank of England (BoE) cut its growth forecasts on Thursday in the face of increased Brexit worries and a slowing global economy. The BoE still struck a relatively dovish tone, commenting that it still expects rates to rise gradually, although much depends on a smooth Brexit transition.

On the economic data front, numbers from the US made for the most interesting reading this week. On Tuesday, Consumer Confidence figures showed a strong rebound in July, rising despite a backdrop of a burgeoning trade war with China. With 5,000 households asked to rate their relative levels of current and future economic conditions, including wages and business conditions, the dial ticked up much higher than many economists had expected.

The week was rounded off with US employment data in the form of Non-Farm Payrolls. Coming in line with forecasts, the world’s largest economy added 164,000 new jobs in July. Unemployment also held steady, but it was average earnings that showed a slight improvement at 3.2% from 3.1% in the previous month.

The week ahead

As the divorce between the UK and EU drags on throughout the summer, Services PMI data for both those who wish to leave the bloc and those who wish to stay in it is released on Monday. Expect many commentators to compare and contrast the economic situation on both sides of the Channel as the numbers are made public.

The services sector is by far the biggest component of the UK economy, and therefore the data will be of a higher prominence on financial markets when it is announced. PMI numbers themselves act as a useful forward indicator, with purchasing managers consulted on their views on business conditions such as employment, new orders and inventories. By the very nature of their jobs, purchasing managers are very well informed and their insights and views make for invaluable reading. With talks between the EU and UK set to continue, PMI data from the bloc’s two largest economies, Germany and France, should allow us to gauge the strength of the Eurozone as a whole.

With Donald Trump having seemingly reignited the ongoing trade war between the US and China via his Twitter account, China’s Trade Balance figures should give analysts a view on just how much of a toll the US President’s tariffs have taken. The difference in China’s imported and exported goods during the previous month may have been severely affected by the trade war that has now dragged on for longer than most commentators would have anticipated.

A lack of meaningful data from the US means that the UK could take centre stage once again towards the end of the week, as both GDP and Manufacturing Production are released on Friday. With GDP growth, the broadest measure of economic activity, having been effectively non-existent over the past months, many in both the City and Westminster will be hoping for at least some good news as Brexit uncertainty takes its toll.