The week that was...
Ace start to the week
With the sun shining over SW19, the real racket was to be found in EC4M as UK stocks began the new quarter, hitting more than nine-month highs after a spate of market-friendly news over the weekend helped buoy global markets. Not only had the oil cartel, OPEC, agreed to extend their production cuts, lifting oil heavyweights such as Royal Dutch Shell and BP, but a thawing relationship between China and the US also gave reason for cheer.
US-China trade talks ahead
During the weekend’s G20 summit in Tokyo, the world’s two largest economies agreed to restart trade talks, giving many investors hope that some kind of resolution to the ongoing rift could be in sight. Trade negotiations will now restart after US President Trump offered concessions to his Chinese counterpart, Xi Jinping, including no new tariffs and an easing of restrictions on Chinese tech company Huawei. In return, China agreed to make unspecified new purchases of US farm machinery.
Expected cuts ahead?
Throughout the week, markets in the US broke new ground as a combination of abating trade fears and an accommodative Federal Reserve spurred investors into riskier assets. It wasn’t just stocks that were in favour however, bonds also enjoyed their moment in the sun on hopes that major central banks would embrace looser monetary policy. US 10-year Treasury yields fell to lows not seen since November 2016 whilst Germany’s equivalent Bunds now yield -0.4%, a strong signal that markets are also expecting a rate cut in Europe as well as in the US. Italian 10-year debt stayed close to its lowest yield since 2016 after the European Commission (EC) dropped their threat to discipline Rome over its public finances. The EC’s actions also pushed Italian stocks to a two-month high.
US employment figures improve
The action in the bond markets drove the MSCI All Country index up to its highest since February last year. However, the end the week saw US Non-Farm Payroll Data being released, the most important piece of employment data in the US Federal Reserve’s thinking. The world’s largest economy beat economists’ forecasts and added 224,000 new jobs in June, rebounding from a weak reading for May. Previous expectations of a rate cut were dealt a blow, as the data signalled the US could be slowing at a gentler pace than previously expected, giving the Fed more time to act. The news remained positive for the dollar, pushing the greenback higher against a basket of developed currencies by 0.5%
The week ahead…
As the summer gets into full swing and the idea of a European getaway enters the minds of potential holiday makers, analysts’ attention will also turn to the continent, but for very different reasons.
The week will start with Europe’s largest economy, Germany, releasing both its trade balance and industrial production. A country’s trade balance is a vitally important piece of economic data and represents the difference between imported and exported goods over the past month. The data is also seasonally adjusted with a positive number indicating that a country exported more than it imported. Exports demand also impacts production and prices at domestic manufacturers as slight movements could mean they need to hire different levels of staff and change the price of their goods. The data is also significant as Germany is seen as Europe’s exporting powerhouse, acting as a bellwether for the overall bloc, with large car manufacturers such as Audi, BMW and Mercedes all sending their products around the world.
With many market commentators having changed tack from betting on a string of US rate rises during 2019 to a possibility of more than one cut, all eyes will be on the Chair of the US Federal Reserve, Jerome Powell, for a speech on Tuesday. Delivering the opening remarks of an event hosted by the Federal Reserve in Boston, unscripted audience questions are encouraged. As head of the US central bank, Powell’s words are extremely important and such addresses are often used to deliver subtle hints about future rate policy, especially when he can be asked anything.
Powell’s words will be assessed in conjunction with a slew of important US economic data including inflation numbers, Natural Gas Storage and the published minutes from the Fed’s previous meeting, all of which could set the tone for the second half of the week.