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Weekly Update - 03 September 2018 (UK/Europe)

  • Global equity markets rose over the week as US equity markets reached record highs. Equity markets rose on the back of easing trade tensions as the US and Mexico reached an agreement on a revamped NAFTA (North American Free Trade Agreement) trade deal and the European Union’s chief Brexit negotiator, Michel Barnier, indicated that a "unprecedented" Brexit deal for the UK may be possible. However, markets retreated later in the week as US President Donald Trump threatened to leave the World Trade Organization and move ahead with his plans to impose additional tariffs on $200bn of Chinese imports. The MSCI AC World Index rose 0.6% in local currency terms, but broad sterling strength dragged down returns to -0.4% in sterling terms. Developed Pacific ex Japan was the best performing region in local currency terms (1.4%), supported by a rally in Australian financial stocks. Japan was the best performing region in sterling terms (0.6%). The UK was the worst performing region in both local currency and sterling terms, falling by 1.9% as broad sterling strength hit UK internationally-focused blue-chip stocks.
  • UK gilt yields rose across all maturities over the week, except at the shortest end of the curve. 10-year UK gilt yield rose by 15bps to 1.43% on speculation that Mark Carney will stay on for an additional year as the governor of the Bank of England. 20-year UK gilt yield rose by 1bp to 1.75%. The 10-year US treasury yield rose by 3bps to 2.85%. In Europe, German bund yields fell by 1bp to 0.33% whilst French government bond yields rose by 1bp to 0.69%. Italian government bond yields rose by 9bps to 3.22% as budget uncertainty prevailed. Greek bond yields rose by 20bps to 4.36%.
  • The 20-year real yield in the UK rose by 3bps to -1.59% and the Over 5-year real yield rose by 4bps to -1.54%. 20-year breakeven inflation fell by 2bps to 3.27%.
  • The US high yield bond spread over US treasury yields rose by 3bps to 349bps and the spread of USD denominated EM debt over US treasury yields rose by 7bps to 370bps over the week. The sterling non-gilt spread over UK gilt yields (based on the Merrill Lynch index) rose by 1bp to 120bps.
  • The S&P GSCI rose by 1.1% in USD terms over the week. The energy sector rose by 1.6% as the price of Brent crude oil gained 2.1% to US$77/BBL. Crude oil prices rose as US crude oil inventories and Iranian crude exports both fell. Industrial metals fell by 1.1% despite copper prices gaining 0.3% to US$6,019/MT. Agricultural prices rose by 0.6% and the gold price gained 0.4% to US$1,202/ounce.
  • Sterling strengthened against major currencies over the week. The US dollar depreciated by 1.1% against sterling, ending the week at $1.30/£. The euro depreciated by 1.0% against sterling, finishing the week at €1.12/£. The Japanese yen appreciated by 0.3% against the US dollar, ending the week at ¥110.89/$.
  • The US economy recorded its faster rate of growth in nearly four years as US GDP growth for the second quarter of 2018 was revised higher to 4.2% from 4.1%, exceeding expectations of a slightly slower 4.0%. The fast pace of growth is, however, unlikely to be sustained with a number of one-off factors influencing growth – namely, the fiscal impulse from tax cuts and a front-loading of exports to avoid the imposition of tariffs. Nevertheless, the US consumer appears to be buoyant with the Conference Board's Consumer Confidence index reaching a near 18-year high of 133.4; up from a revised 127.9 and forecasts of 126.6. The advance reading of the US trade deficit widened by more than analyst forecasts, growing to $72.2bn from a downwardly-revised $67.9bn. The US Federal Reserve's (Fed) preferred measure of consumer price inflation, the core Personal Consumption Expenditure price deflator, met expectations in the second quarter and moved to 2.0% – in line with the Fed's inflation target.
  • Despite prevailing Brexit uncertainty in the UK, the GfK Consumer Confidence index unexpectedly improved by 3 points to -7 in August, beating analyst forecasts of an unchanged reading of -10. This was in stark contrast to the Lloyds Bank Business Barometer which fell to 23 from 29. The Nationwide House Price index recorded a 0.5% fall in house prices in the month of August, partially reversing the 0.7% growth in the previous month and undershooting expectations of 0.1% growth. House prices therefore grew by 2.0% in the year to August, below expectations of a 2.7% growth.
  • Consumer prices in the Eurozone rose by 2.0% in the year to August, marginally slowing from July and undershooting the 2.1% inflation rate forecasted by analysts. Consumer prices in Germany also grew by 2.0% in the year to August, matching expectations and in line with last month's inflation rate. The Eurozone unemployment rate in July was in line with analyst forecasts at 8.2%, unchanged from June’s downwardly-revised figure at the lowest level since December 2008. Elsewhere, retail sales in Germany declined by 0.4% in July, slowing from 1.2% growth recorded previously and falling short of expectations of a 0.2% decline.
  • Japanese industrial production contracted marginally by 0.1% in July, based on preliminary data, partly due to major flooding in the country. It was worse than the forecasted 0.2% increase but a marked improvement from June's 1.8% fall. Retail sales inched slightly higher in July but the pace of growth almost ground to a halt at 0.1% from the revised 1.4% increase in June. July’s employment report was little changed from the previous month as the jobless rate moved to 2.5% while the job-to-applicant ratio rose marginally to 1.63.
  • The official Chinese manufacturing Purchasing Mangers' Index (PMI) for August rose by 0.1 to 51.3, supported by a pick-up in production. However, new export orders fell as indicated by rising inventories of finished goods. The services sector also surpassed expectations of a 0.3 point fall with the non-manufacturing PMI rising to 54.2 from 54.0. Industrial profit growth slowed for a third consecutive month to 16.2% over the year to July from the previous reading of 20.0% as a combination of weaker domestic consumption, rising credit defaults and US trade tensions impacted the Chinese economy.
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