Insight Multi-Asset update – week beginning 30 September, 2019

From

Market and economic review

Markets had a lot to digest last week ranging from a variety of data releases, political challenges and trade war developments. Once consumed, developed market equities were broadly flat and emerging market equities were down 1-2%. Government bond yields tightened while the riskier end of the fixed income spectrum posted small losses. Within FX, the US dollar was strong over the week, particularly against the euro, which reflects the poor data releases discussed further below.

Data releases show continued deterioration in European manufacturing

The week started on a negative note for Europe with poor provisional Purchasing Manager Indices (PMI) releases for September. At an overall level, the composite PMI for the eurozone was 50.4, which is a decrease of 1.5 month-on-month. Germany remains the epicentre of the European slowdown with the composite print falling further to 49.1, and the manufacturing component reaching a low 41.4. Our regular readers will know that any reading below 50 implies deterioration in the economic environment, and hence these readings do not bode well for an uptick in economic growth any time soon. One question we have been pondering is how long services can hold up negative readings in manufacturing – this PMI release is the first sign we have seen of the manufacturing weakness spreading.

Outside of Europe the picture was less gloomy, with Australia and the US both printing positive PMIs. The US composite reading was 51.0 (an increase of 0.3 month-on-month), however this is still relatively low. For Australia, the composite increased 2.6 points to 51.9 which was mostly driven by the services component.

President Trump and trade dominate news headlines

Last week’s news headline were again dominated by President Trump as the US Democratic Party began a formal impeachment inquiry over allegations that he pressured a foreign power (Ukraine) to damage a political rival (Joe Biden, the current favourite to challenge President Trump in the 2020 US election). Any negative feed through to equity markets was reversed as President Trump announced a trade deal with China “could happen sooner than you think”. Whilst that seems promising, it is worth remembering that the president has previously released positive news on the trade front simply to reverse a dip in equity market performance. As a reminder, the US is due to further raise tariffs on Chinese goods on 1 October.

In other political developments, the UK Supreme Court ruled that Prime Minister Boris Johnson was unlawful in proroguing Parliament. They have now returned to the House of Commons to continue debating a solution to the Brexit impasse. Prime Minister Johnson is pushing the opposition for an early general election; however opposition leaders have little appetite until they can ensure that any chance of the UK leaving the European Union with no Brexit deal is removed.

Outlook

There are a number of key highlights to look out for this week. The most important data releases in terms of market performance will likely be the US non-farm payrolls number and the ISM print, with the latter falling into contraction last month. Outside of the US, we will receive more PMI data; both the final September European readings and also prints from China at the start of the week. With a decline in the year-on-year Chinese industrial profits number recently released, and commentary from the Peoples Bank of China that was less dovish than the market was hoping for, the data releases from China will be worth watching closely. 

Away from the data docket, we expect headlines to continue to be dominated by both political developments within the US and ongoing trade discussions.

By Adam Kibble, Investment specialist

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