A WAVE OF POSITIVE NEWS
Markets received some pieces of good news related to the trade negotiations between the US and China at the end of the week. According to US President Trump, the US and China agreed on Friday on the outlines of a partial trade, which could be signed as early as next month. After a long period of uncertainty, we finally have at least some sort of a solution to the prolonged trade tensions between the two largest economies on the globe while the ‘partial deal’ could also be a sign that trade tensions may not escalate any further.
S&P 2,970 +0.62%, 10yr Treasury 1.73% +20.00bps, HY Credit Index 347 -12bps, Vix 15.76 -1.46Vol
US President Trump’s comments that the US and China reached a ‘very substantial phase one deal’ stoked investor appetite for riskier assets. Under the pact, the US suspends a planned tariff increase for the 15th October, whilst China agreed to some agricultural concessions. Greater appetite for riskier assets triggered outflows from the US Treasury market, which pushed the whole yield curve upwards and led to a weaker greenback (the broad trade-weighted DXY index decreased -0.5%). Consequently, the 2-year Treasury yield rose 19bp to 1.59% and the 10-year increased 20bp to 1.73%. Meanwhile, stock indices gained in the US, as the S&P 500 rose 0.6%, whilst the Nasdaq Composite edged up 0.9% by the end of the trading week.
Eurostoxx 3,550 +4.21%, German Bund -0.48% +14.40bps, Xover Credit Index 243 -8bps, USDEUR .908 -0.60%
Due to the improvement in global investor sentiment triggered by constructive comments on the trade negotiations by the US and China, the outlook for global economic growth has become somewhat less gloomy, which in turn led to a bounce in European stock indices. As a result, the benchmark indices in the four largest Eurozone economies and in the UK rose between 3.9-4.8% (in USD). The improvement in appetite for riskier asset drove sovereign yields higher: 10-year German Bund yield increased 14bp to -0.44%, whilst the 10-year Italian rose 11bp to 0.94%.
HSCEI 10,508 +3.01%, Nikkei 21,798.87 +0.38%, 10yr JGB 0.18% +0bps, USDJPY 108.210 +1.43%
Asian stocks and currencies rallied towards the back end of the week (MSCI Asia Pacific ex. Japan index up 1.6% in USD) in response to the constructive comments by US President Trump and the Chinese administration. With only a few exceptions, the vast majority of the emerging Asian stock indices gained by the end of the week. The Pakistani stock market was one of the greatest beneficiaries, as the country’s benchmark index rose 4.1% in USD. Meanwhile, Chinese “A” shares rose 3.2% and “H” shares 3% (all in USD).
The Chinese Caixin services PMI weakened in September, as the index eased to 51.3. According to the details, services activity further strengthened thanks to rising domestic demand, whilst employment in the services sector continued to increase. However, there were two factors that dragged down the headline index: lower export orders and rising input costs (through a weaker exchange rate, rising wages, fuel and raw materials). According to the commentary, the Chinese domestic economy ‘shows signs of stability’.
Industrial output in India contracted 1.1% YoY in August, and as a result surprised to the downside relative to the market consensus, which predicted the continuation of further strengthening in industrial activity. The manufacturing sector (-1.2% YoY) continued to contribute to the weakness in industrial output, as the production by the majority of the manufacturing branches declined in an annual comparison. Electricity generation followed suit, as it decreased 0.9% YoY. In contrast, mining output was broadly flat.
The tone of the minutes released by the Thai central bank shifted to a slightly more dovish tone, citing downside risks to economic growth (related to external uncertainties, such as the trade tensions between the US and China, Brexit and the prolonged electronics down-cycle) as well as inflation. Consequently, members of the MPC expect the Thai economy to expand below its potential in 2019 and 2020.
MSCI Lat Am 2,703 +0.39%
Latin American stock markets edged up by the end of the week (MSCI EM Latin America index rose 0.4% in USD), due to the improvement in global market sentiment. The Chilean stock market was one of the best performers in the region, as the country’s reference index increased 2.4% in USD. The Chilean market was followed by the Peruvian (0.8% in USD) and Mexican (0.7% in USD) markets.
Retail sales volume in Brazil rose 1.3% YoY in August. Although the annual rate of growth was slower than in July (when retail sales volume grew 4.3% YoY), the basis of growth has become broader since the beginning of the year. Whilst food, beverage and tobacco sales volume rose 2.4% YoY, fuel sales decreased 2.9% YoY. Sales of durable goods remained uneven and volatile across various goods categories.
The central bank of Peru kept the policy rate at 2.50%. The MPC’s noted that non-primary economic activity continued to recover, while public investment execution was expected to improve for the rest of the year. Furthermore, the MPC mentioned a slight improvement in business confidence expectations.
Unless there is a marked pick-up in economic activity indicators, the central bank will likely cut the interest rate in the coming months.
The minutes from the Mexican central bank’s last monetary policy meeting was released, which showed that the decision to cut the key rate by 25bp was not unanimous, as two members voted for a greater degree of monetary accommodation. The majority opinion favoured a prudent and gradual approach. Their focus on the Federal Reserve (and increasingly, other central banks) and macroeconomic uncertainty underpinned the resistance to a more aggressive pace than 25bp.
MSCI Africa 758 +3.64%
Stock market performance in Africa was mixed during the week. The South African stock index gained 4.8% in USD, as the country’s capital market is sensitive to external developments, i.e. to the improvement in global risk appetite due to the constructive news related to the US-China trade talks. Meanwhile, the Egyptian market rose 1% in USD.
Inflation in Egypt further slowed, as headline inflation decelerated to 4.8% YoY in September (vs. 7.5% YoY in the previous month). The headline gauge did not moderate in isolation; the closely watched core measure (which filters out the impact of volatile prices such as energy or unprocessed food) markedly fell, to 2.6% YoY.
A drop in inflation with such magnitude opens the door for the central bank to further reduce the policy interest rate in the coming months.
South African business confidence improved to 92.4 in September, recovering from a 34-year low in the previous month. According to the survey, the South African economy could have hit a trough and could stabilise. However, details show that a marked pick-up in economic activity is unlikely in the short-term.
Nigeria’s government may drive up inflation when it increases a sales tax to partly finance its record 2020 budget (NGN 10.3tn or USD 33.8bn) and implements a new minimum wage, the International Monetary Fund (IMF) warned. According to the IMF, Buhari’s government has repeatedly rolled out record spending plans in the past but struggled to fund them due to lower oil output and an inability to boost non-oil exports. This has kept the government dependent on expensive borrowing.
This week’s global market outlook is powered by Alquity www.alquity.com