Insight Multi-Asset weekly update – week commencing 9 September, 2019

From

Market and economic review

US-China trade talks resume and constructive political developments support risk assets

Risk assets performed well last week as investor sentiment was buoyed by a series of supportive trade and political developments. The main catalyst was the agreement between the US and China to meet for a new round of trade talks, scheduled to take place in Washington in early October. In Europe, positive political developments in Italy emerged as the Five Star movement and Democratic Party agreed the formulation of a coalition. 

Although some doubts remain around the longevity of the partnership, it is likely that Italy is entering a period of relative stability. Hopes are that the European political establishment will view this new coalition as more friendly, which should lead to greater fiscal flexibility when negotiating the budget in the coming months. This increasingly positive backdrop has been reflected in Italian assets; government bond spreads over German bunds tightened and the equity market outperformed other European markets.

In Asia, political developments in Hong Kong boosted risk assets in the region as Chief Executive Carrie Lam formally withdrew the extradition bill which had sparked months of protests. The local equity market gained 3% on the news.

In China, the People’s Bank of China announced it was reducing the required reserve ratio for banks by 50bp, aimed mainly at supporting the smaller banks. This move to provide greater liquidity is the latest measure by the Chinese central bank to reaffirm its commitment to support the broader economy. 

Once again, UK politics was gripped by the Brexit debate. Prime Minister Boris Johnson faced stiff opposition to his plans of a no-deal Brexit. Early in the week, the Conservative Party lost its majority as a single defection tilted the balance against the government. As the week progressed, an opposition-backed bill, designed to avoid a no-deal Brexit, passed its first vote, while the prime minister’s attempt to call an early election was rejected. The positive reaction of sterling, which rallied over 3% from its lows on Wednesday, clearly reflected some market relief that a no-deal exit was less likely.

Weak manufacturing offset by strong services activity

The emerging theme of weak manufacturing activity being offset by strong services was evident from the data released last week, which was important for first-order data releases. It kicked off over the weekend with the Chinese official manufacturing PMI missing consensus, while the Caixin manufacturing data beat consensus, crucially above 50. In Europe, manufacturing PMIs offered a slight improvement, but are still indicating a contraction in activity. Italy, France and Spain narrowly beat consensus expectations, but Germany was a touch weaker.

The US ISM manufacturing release missed expectations and, at 49.1, also moved into contractionary territory. The subcomponents were also weak, including a marked slowdown in the outlook for export orders. Non-manufacturing PMIs, released later in the week, provided some positive news. Services PMIs in Europe and China beat consensus and remained comfortably above 50, and the US non-manufacturing ISM followed suit at 56.4, beating consensus expectations.

That global manufacturing PMIs have been in ‘contractionary’ territory for three months remains a concern. After last week’s crucial data releases the backdrop remains mixed; while there is obvious fragility in the manufacturing sector, the services data suggest there are elements of strength within major economies.

The US labour report was released at the tail end of last week. Non-farm payrolls gains were weaker than expected in August at 130,000, versus a consensus expectation of 160,000. While not worrying, they reflect a general slowing in the pace of hiring, although the average hourly wage data released confirmed that small wage gains remain intact in the US. 

Outlook

The coming week will see a quieter schedule for first order data releases. The US CPI data, released on Thursday, will be the main data point of focus. Given that US average hourly earnings remain solid, we continue to watch for signs of a feedthrough to inflation data.

Further easing measures are expected from the European Central Bank meeting on Thursday. Focus will no doubt shift to any assessment of potential negative consequences on the banking system of such further liquidity provisions.

In the UK, the Brexit process will be in the spotlight particularly as the window for avoiding a no-deal exit is short, with Parliament due to be suspended from tomorrow.

By Adam Kibble, Investment Specialist

You must be logged in to post or view comments.