Markets have exhibited a degree of nervousness this week as geopolitical risks have risen. President Trump started the week suggesting the US would be willing to tackle the North Korean problem alone, and finished with a missile strike against Syria, following a gas attack earlier in the week which killed over 70 people.
Investor jitters were further compounded by news that the Federal Reserve is discussing shrinking its balance sheet, and simultaneously raising rates whilst the US economy remains robust. If that was not enough to keep investors’ minds occupied, at 1.30pm London time today, the latest US non-farm payrolls figure is due for release. The S&P 500 at 12pm London time was down 0.2% for the week, the Eurostoxx 50 was down 1.1%, Japanese Topix down 1.5%, Australian S&P/ASX 200 flat, whilst the FTSE All share was up 0.1% aided by a weakening pound, and the Shanghai Composite was up 2%, despite being closed the first two days of the week for public holidays.
The week began with the release of global manufacturing purchasing managers’ indices (PMI) which painted a broadly positive picture. The US Institute for Supply Management’s Manufacturing index eased to 57.2 in March, down from 57.7 but still close to a 2-year high and still well above 50, the level that separates expansion from contraction. Similarly, the Eurozone manufacturing PMI for March was confirmed at 56.2, close to a 6-year high. This raised hopes that growth in the Eurozone for the first quarter of 2017 will beat the 0.4% quarter on quarter expansion achieved in the final 2 quarters of 2016. However, commentators cautioned that recent survey data, or soft data, has tended to be stronger than hard Eurozone data. The Chinese Caixin-Markit manufacturing PMI fell to 51.7 in March, but nonetheless, this was the 9th successive reading above 50.
This positive data was largely brushed aside by markets as investors fretted that US equity valuations remain at elevated levels, whilst concerns are rising that President Trump will struggle to deliver on many of his electoral pledges, as demonstrated by his unsuccessful attempt to repeal Obamacare (Affordable Care Act).
In the UK, growth accelerated in the UK’s dominant service sector, hitting a 3-month high and beating forecasts due to stronger domestic demand. However, the survey excludes the retail sector and therefore may be presenting an overly optimistic picture. On Friday, the industrial sector suffered an unexpected contraction for the month of February which pushed sterling lower.
Industrial production, which accounts for 15% of the UK economy, fell by 0.7% in February, the 2nd consecutive monthly decline.
Australia recorded its 2nd highest nominal trade surplus on record for the month of February, supported by rising commodity prices. Residential building approvals rose for the 2nd consecutive month in February, jumping 8.3% on January, the largest increase since October 2015. Residential property prices in Sydney and Melbourne have risen by 19% and 16% respectively over the past 12 months.
The Australian central bank left interest rates unchanged this week, but backed steps to crack down on risky lending, particularly interest only mortgages, in an attempt to tame speculative property purchases.
Mario Draghi, President of the European Central Bank (ECB), clarified thoughts on the ECB raising Eurozone interest rates on the back of improving economic data. There will be no rate rises before the bond purchasing programme has completed, i.e. there will be no rate rises in 2017, and further to this, the ECB wishes to see stronger evidence that inflation is converging towards their 2% target before acting.
On Friday, Germany released its latest industrial production data, with industrial production having expanded by 2.2% in February, versus economists’ forecasts of a contraction. The German economy has been firing on all cylinders with unemployment at its lowest level since reunification in 1990, with growth having expanded at its fastest pace in 6 years over 2016.
The Chinese Shanghai Composite rose to a 4-month high, despite being closed for public holidays on Monday and Tuesday, as the Beijing government announced that it would launch a big new economic zone in Hebei Province, to rival Shenzhen and Shanghai. This led to stocks related to the area soaring in price.
Following a gas attack in Syria, with the finger being firmly pointed at President Bashar al-Assad, the US launched a missile attack on the airfield from where the attack was deemed to have originated.
This led to a rally in safe haven assets, with gold reaching a year to date high of $1,264 an ounce. The oil price also benefitted as investors worried about Middle Eastern supply. Brent crude is currently trading at a one month high of $55.1 a barrel.
We continue to weigh up equity valuations, particularly in the US, versus an improving global economic outlook. When Donald Trump became President, we were very wary about how much of his electoral pledges would be achievable due to the checks and balances within the US political system. Especially as many of his pledges fly in the face of Republican party ideology. However, we also believed that markets would give him the benefit of the doubt, at least for a short while. As he has fallen at the first hurdle with the failure to repeal Obamacare, we are increasingly questioning which of his pledges are more likely to be achievable. Fiscal stimulus to the level he pledged was always doubtful in the first year. Corporate tax reform, although very much on song with Republicans, is littered with the potential for unintended consequences and is likely to be either watered down, or take much longer to enact than Trump or markets would like. Deregulation of financial services looks to be his best bet, as much of this can be done without needing to go through Congress. But of course, the elephant in the room remains protectionism.
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