Insight Investment’s global economic outlook for the week ahead (week beginning 26 November 2018)
Outlook
On the data front, the German IFO survey (Monday) will be closely watched, given the recent weakness in the country’s manufacturing sector. While the end of the week sees a number of European inflation releases.
On Wednesday the Bank of England publishes its Financial Stability Report and the results of its annual stress test of the UK banks. In the US, consumer confidence (Tuesday) and the second print of the third-quarter GDP (Wednesday) are data highlights.
The Federal Open Market Committee minutes (from the Nov 7-8 meeting) are released on Thursday. Expectations for a December rate hike are largely priced-in, but attention will focus on the discussions around the longer-term ‘neutral rate’. Federal Reserve chairman Powell (and vice chair Richard Clarida) are also due to speak on monetary policy ahead of the minutes, and these speeches may give a more timely update on the debate around the likely path of interest rates given increasing uncertainty.
Probably the most anticipated event comes towards the end of the week. Presidents Donald Trump and Xi Jinping are due to meet at the G20 summit in Argentina, which begins on
Friday.
Market and economic review
Risk asset sell-off resumes – tech and energy concerns continue to compound macro uncertainty
Despite the absence of major macroeconomic data points, there was plenty of market-moving news in what was billed to be a relatively quiet, holiday-shortened week. At the beginning, the APEC (Asia-Pacific Economic Cooperation) meeting concluded without China and the US producing a communique (for the first time since the summit began in 1993). The two countries are clearly a long way apart in how they view a host of issues. Indeed, reports highlighted the US administration’s unease with growing Chinese influence (with a particular focus on the one belt and road infrastructure programme) and that goes well beyond the arena of trade. Clearly, this does not bode well for a substantive agreement at the forthcoming G20 meeting at month end. After the precipitous falls of October, equity market sentiment was fragile and bottom-up news helped trigger another slide.
Further talk of slowing iPhone demand and increased regulation of social media provided a slew of negative headlines surrounding key technology bellwethers. The closely-followed FAANG Technology index fell sharply and is now around 20% below its June high from earlier this year. The price action could be viewed as simply an aggressive unwinding of holdings that had been amongst the biggest winners this year. An alternative interpretation is that with growth and earnings estimates being downgraded, those assets trading on the loftiest valuations are most vulnerable in any re-assessment. Concerns over holiday sales in the run-up to Thanksgiving holidays did little to lift the tone and profit reports from some key US retailers were taken badly by the market.
Credit got caught up as well, with spreads widening once again across investment grade and high yield. Falling energy prices did not help as the slide in oil prices accelerated (WTI is down close to 30% since early October) amid concerns over excess supply.
Italian budget concerns and Brexit – uncertainty remains hight
Italian bond spreads rose sharply as rhetoric built towards the European Commission’s (EC) judgement on the Italian budget on Wednesday. Markets found some relief when Deputy Italian Prime Minister Salvini suggested there were some areas that were open to revision. The EC then responded that the country’s budget was breaching debt reduction commitments and at serious risk of non-compliance with EC rules. The EC said that it is not yet opening excessive deficit procedures, but suggested that this is likely. The ball is now back in Italy’s court, and the conflict between the populist government in Italy and the EC is likely to roll into next year.
It was a fairly light week on the data front. US durable goods were weaker than expected and consumer sentiment (University of Michigan) also moderated. US housing data (in the form of the NAHB survey) fell to its lowest reading since August 2016, posting its biggest monthly drop since early 2014. In Europe, the flash PMI’s for November were the highlight. At a Eurozone level, both manufacturing and services missed expectations and saw marginal declines compared to last month. Brexit headlines dominated the news in the UK. Prime Minister Theresa May has so far avoided a formal leadership challenge from within her own party and is pressing to get UK approval for the negotiated withdrawal agreement she is proposing with the EU. Assuming this, and a political declaration (which would be used as the basis for a trade agreement between the UK and the EU), are signed off this weekend, the deal will go before the UK parliament. At this stage, it is unclear whether it will garner the necessary support.
The Organisation for Economic Co-operation and Development updated its global economic forecasts this week. Global growth expectations were revised down for 2019 (to 3.5% from 3.9%), while growth is expected to remain steady in 2020, with stronger emerging economies offsetting further moderation in developed economies and China.
