Insight Multi-Asset weekly update

From

Market and economic review 

Despite a number of updates from central banks, weak data releases and geopolitical tensions, last week was a fairly quiet week for market performance. Equities retraced some of their gains from the previous week, predominantly due to poor economic data releases from both China and the US. Government bonds performed relatively well against this backdrop, and the geopolitical climate worsened with an attack on a Saudi Arabian oil facility.

A Fed cut in line with expectations, with the future less certain

At the Federal Open Market Committee (FOMC) meeting last Wednesday, the federal funds rate was cut by 25bps. This was widely expected, albeit markets were pricing a small probability of a larger 50bp cut. The committee was somewhat divided, voting 7-3 in favour of this cut, with two in favour of no change and one voting for a 50bp reduction. Markets are now pricing the most likely event is a further cut by the end of 2019. As for the ‘dot plots’, rather than the overall level, we found the distribution more telling, with a marked shift lower. In other central bank activity, both the Bank of England and Bank of Japan took no action to change interest rates, with the former keeping the base rate at 0.75%, and the latter keeping the deposit rate at 0%.

Disappointment in economic data releases

Chinese economic data releases missed expectations and declined. Particularly of note were: industrial production at 4.4% year-on-year (YoY) (vs. 5.2% expected), the lowest print since February 2002; retail sales at 7.5% YoY (vs. 7.9% expected); and fixed asset investment decreasing to 5.5% YoY (v. 5.7% expected). Soft data did not only originate from China; in the US, the Empire Manufacturing Survey declined 2.8pts to 2.0 (vs. 4.0 expected). The only positive to take from this was a climb in the employment number, which reached its highest level in five months. In Germany, the ZEW Survey continued to decline, which at the margin is a further disappointment and reflects expectations of further slowing in economic growth.

An unexpected attack adds to geopolitical uncertainty

Oil was an unexpected focal point early in the week, opening 20% higher on the back of reports of an attack on a Saudi Arabian oil facility on the evening of 13 September. Early indications were that around half of Saudi Arabia’s daily oil production (which equals about 5% of world total) had been taken offline. Although this benefitted the energy sector in equities and proved positive for currencies of oil-exporting countries, the overall effect on global markets was relatively muted. As the week progressed, oil retraced its earlier gains on reports that output would be fully back online in a matter of weeks. More widely, these developments could further weigh on global political uncertainty.

Outlook

Given the divided committee at the FOMC meeting, it will be interesting to hear from several Fed speakers in the week ahead. Aside from this, and European Central Bank President Draghi’s final session before the European Parliament’s Economic and Monetary Affairs Committee, we expect that central bank activity will be relatively quiet.

Preliminary September PMIs for Australia, France, Germany, the euro area and the US are due to be released early in the week. After the August PMIs suggested a glimpse of positivity, with global manufacturing bottoming out, the September numbers will be ones to watch closely.

By Adam Kibble, Investment Specialist

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