12th August 2019

Stocks had a roller-coaster ride last week, with sharp falls initially on trade concerns between China and the US. These fears eased over the week, as China limited the downside in their currency and more Central banks eased their policy rates. We expect choppiness to continue this week, as volumes dry up a bit (as is usual for August) and there’s some key data out of China on Wednesday and the US on Thursday. UK data tomorrow and Wednesday will likely shape the week for the Pound.

Last Week

  • Stock markets traded down on trade fears
  • Gold continued to shine
  • Bond yields fell to new record lows
  • UK economy contracted and dragged the Pound down further
  • Trade tensions between the US and China escalated
  • Italy added to the “worry list” for markets

This Week

  • There’s a fair amount of data to look out for this week. The highlights being:
  • In the UK, we have unemployment and wage data tomorrow and then inflation data out on Wednesday.
  • Inflation data is a theme this week, with CPI data out in the US tomorrow and then we’ve got US retail sales data on Thursday to look out for.
  • China news is likely to continue to move markets this week, with a big data dump on Wednesday: Fixed asset investment, Retail Sales and Industrial Production.

Last Week’s Highlights​

Stocks see-sawed last week, but ultimately ended down, as trade fears hurt investor sentiment. Once again, a weak Pound helped to stem overseas’ losses, with global stocks flat for the week in GBP terms with the Pound off just over 1% versus the US Dollar. Economically sensitive markets fared worst, with China down 3.2% and Japan down 1.9%. The UK All Share was down 1.4%, with value sectors such as banks and insurance dragging the most.

The US earnings season is nearly done, with 90% of the S&P 500 companies having reported. 75% of companies have beaten on earnings expectations and 57% have beaten on sales expectations. This is optically good, but is not spectacular on deeper digging, due to the fact that these expectations were heavily revised down going into the reporting season. As things stand, the blended “growth” rate is -0.7%; i.e. a contraction (-2.7% was expected at the start of the period). If it holds here, it will mark 2 consecutive quarters of earnings decline; the first time this has happened since the first half of 2016. Health care and financials have led the way in terms of earnings growth, with materials and industrials the laggards.

Gold continued to shine, with the metal up over 4% on the week. This takes returns for the year to over 23%. Gold miners rose over 6.5% last week, which takes returns for the year to over 52.5%. Fresnillo was the best performing stock in the FTSE 100, up by just over 11%.

Bond markets continued their charge, with yields dropping to fresh record lows. UK gilts were up 0.9% for the week as were US Treasuries. Credit spreads sold off a little bit, but the contraction in nominal yields helped to limit losses. The US 2yr10yr yield curve has a spread of just under 0.1% which is its flattest since June 2007. This curve has historically been a very reliable indicator of recession, with on average 18 months until recession from when it inverts (i.e. goes below zero).

The Pound had another poor week, down over 1% versus the US Dollar and is now trading around 1.2 to the US Dollar. This is around the 2016 post EU Referendum-vote-lows. One has to go back to 1985 to find lower-lows, where the Pound traded as low as 1.06 vs the Dollar.

Trade tension gripped markets last week, with the Chinese Yuan being allowed to weaken past a rate of 7 to the US Dollar for the first time since the Global Financial Crisis in 2008. This was in response to the US ratcheting up a further round of tariffs on $300bn of Chinese goods at the end of the prior week. This then prompted President Trump to take to Twitter, brandishing China as a “currency manipulator”. Last week, the Chinese officially halted purchases of US agricultural products and President Trump also declared that the US will not do business with 5G giant Huawei without a trade deal.

Italy added to the worry list for markets at the end of the week, as Italy’s ruling League party put forward a motion of no confidence in Prime Minister Giuseppe Conte. This came after its leader Matteo Salvino called time on Italy’s governing coalition. Italian bond and equity markets sold off fairly heavily as the prospect of an Autumn election in Italy is now firmly on the cards. Uncertainty is never good for markets, but it is worth bearing in mind that Italy has had 66 different governments since World War II so it is somewhat par for the course!

UK economic growth numbers came out on Friday last week and showed that the economy shrank in the 2nd quarter. This marked the first time the economy has shrunk in a calendar quarter since 2012. The consumer sector was actually a positive (mildly so) contributor to growth, but this was far outweighed by a big decline in the production sector, with manufacturing in particular weighing as the unwinding of stockpiling dragged the aggregate figure into contraction.

Asset Returns

Equities & Oil: returns are all in base currency, save for Global and Emerging which are in GBP. Bond returns are all shown in GBP. Gold in GBP. Source: Bloomberg.

UK economy contracted last quarter for the first time since 2012..

Source: Financial Times

Rory McPherson
Head of Investment Strategy