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 October 2019.
It seems the “genuine attempt to bridge the chasm” failed to tip the balance amongst investors, who are weary of promises made before, as markets failed to react to the Prime Minister’s final Brexit plan. Sterling remained unmoved, although it did rise towards the end of the week, and rangebound between $1.23-$1.24, despite the Irish PM commenting that he was “not encouraged”. Addressing his party conference in Manchester, Boris Johnson said his plan would be a “compromise by the UK”, but he hoped the EU would “understand that and compromise in their turn”.
Whilst uncertainty reigned in Westminster, the scale of panic in the City of London also increased as both the FTSE 100 and FTSE 250 suffered considerable drops after an “ominous” PMI reading from the services sector, suggesting that the largest sector of the UK economy has now been hit by an economic downturn. With a reading above 50 signaling expansion, the data came in painfully low at 49.5, way below analysts’ forecast of 50.3. The sector, which makes up around four-fifths of the UK economy, saw its activity unexpectedly shrink in September. Firms reported the biggest drop in employment in nine years, with companies not replacing leaving staff and suffering from clients delaying orders because of Brexit.
Poor economic data from across the pond also rocked markets as the US Manufacturing PMI data produced the lowest reading in 10 years as exports deteriorated, largely driven by the on-going US-China trade wars. US Non-manufacturing PMI data was also weak, falling to a three year low of 52.6, well below the expected 55 and its August reading of 56.4.
US Non-Farm Payroll data came in on Friday showing that 136,000 jobs had been added in September, below the market’s expectations of 145,000 but still bringing US unemployment to 3.5%, the lowest on records.
If markets were considered turbulent this week, Hong Kong is a full-blown hurricane. Tuesday saw the 70th anniversary of the founding of the People’s Republic of China. On mainland China the event was marked with powerful nationalist speeches and well-coordinated parades, while Hong Kong celebrated it with escalating anti-China protests, which saw the first protester shot with live ammunition by the Hong Kong police. Such actions could become more common as China clamps down further, having banned face masks overnight using old colonial laws, while the protesters show no signs of lamenting and continue their lofty demands for self-determination.
After a turbulent week in markets, the following five days have key data releases from the major economies which should keep investors on their toes.
On Monday we have German Factory Orders. Germany, a large exporting economy, has been a collateral casualty of the US-China trade wars and recent data demonstrate that effect clearly. China Services PMI is also released on Monday. China is trying to shift to a more service-based economy and September’s number was at a three-month high so investors will be hoping this momentum continues.
Federal Reserve Chairman, Jerome Powell, speaks before the National Association for Business Economics in Denver on Tuesday and investors will be trying to derive any hints or clues from his address as to his view of the current state of the US economy. Investors will only have to wait 24 hours for more insights from the US Fed, with their latest meeting minutes published on Wednesday morning. Alongside the minutes, Crude Oil Inventories data is released, which should make for interesting reading after the recent supply disruption in Saudi Arabia, which may have led to an increased draw on inventories.
The UK economy steps into the spotlight later in the week with UK Industrial and Manufacturing Production published. Both figures are expected to decline from last year’s reading, highlighting the impact of Brexit on the UK economy.
As the week ends, we will receive the US inflation data. Bond markets are pricing in very low levels of inflation, however, with tight labour markets and wage growth, there is a risk inflation could begin to manifest, especially with the US Fed now in easing mode. As such, it is something to watch closely and be mindful of the potential impact on bond markets.