By: Richard Lee
Global Macroeconomic Environment
Global growth concerns have been reignited with weak European data at the start of the week, primarily driven by a steep drop in German manufacturing activity. The European Central Bank (ECB) has already cut interest rates further into negative territory and has revived its €2.6tn bond buying programme this week in response. While this significant monetary stimulus package was criticised by ECB council members and has caused deep divisions, European Central Bank President Mario Draghi has defended the move, citing geopolitical uncertainty. This is despite the fact that unemployment in the economic zone has fallen to its lowest level for a decade.
Such concerns regarding global growth have not been helped in the U.S., with the core inflation index release, showing growth at 0.14% seasonally adjusted last month from July. This is well below the Federal Reserve’s annual target of 2%, suggesting declines in consumer confidence in the region. In U.S. central banking news, there was significant demand over the New York Fed’s Tuesday repo operation, reaching $62bn for the $30bn on offer. These operations have continued further into the week. This suggests that banks are looking to shore up short-term financing ahead of the end of the third quarter. Analysts and traders have welcomed the central authority’s move to intervene before stress took a hold at the end of the month and towards year end.
The significant volatility over the last week concerning the U.S.-China trade war have also added to the negative global narrative. Trade negotiations were being described as ‘constructive’ and ‘productive’ to ‘concerning’ due to a cancelled U.S. farm visit by a Chinese delegation at the start of the week to optimistic at the end of the week. The market has currently priced a positive outcome for the trade talks at the end of the week, however such sentiment can turn on a whim.
Source: NBC News
Global equities have continued into their second week of declines, driven by several narratives from trade fears and weak global economic growth to impeachment calls towards U.S. president Donald Trump. The S&P 500 pulled back by -0.53% on Friday, with declines occurring in four of the five weekdays last week. Conversely, Europe’s STOXX 600 has seen relatively positive moves over the last week, with a 0.47% gain on Friday and climbs occurring in three of the five weekdays last week. This comes with the renewed move by the ECB to prop up the region’s economy with a combination of conventional and unconventional monetary policy.
U.S. yields have experienced a volatile week, however have ended lower at the end of the period. The U.S. benchmark 10-year note ended the week at 1.6355%, down 1.9 basis points on Friday. Climbs in yields during the week have been driven by positive sentiment regarding trade war talks, while overpowering declines have been driven by U.S. political uncertainty and growth in the wider economy. European bonds have experienced similar yield declines, with inflation data appearing disappointing despite the ECB’s monetary stimulus announcement earlier in the month, along with the prospect of poor economic outcomes. Germany’s, along with France’s and Spain’s 10-year bond yields have fallen 6-9 basis points this week, the biggest weekly falls in six weeks for the latter two. This has highlighted a structural, as opposed to cyclical weakness in the single currency economy.
Source: Daily Express
Surprisingly, gold prices have taken a hit over the last week, despite the poor economic outlook and geopolitical uncertainty; gold futures at $1,503.45 at the end of the week. One factor for this fall has been due to expectations that U.S. nonfarm payrolls will beat estimates. Crude oil prices have also fallen on the week on the head of the U.S. pumping oil at record rates, despite the sixth week of oil rig declines. Saudi Arabia has also agreed to a ceasefire in Yemen and Iran has claimed that the U.S. has agreed to lift sanctions, a claim the U.S. denies, all of which has added to the decline of crude oil price.
With the significant intervention by central banks globally, currency moves have been fairly volatile during the week. The Sterling has faced one of the worst weeks since early August with the backdrop of European political uncertainty regarding Brexit and Boris Johnson’s defeat at the hands of the Supreme Court. The GBP/USD was 1.2289 at the end of the week. This has further been pushed lower with a Bank of England official highlighting the possibility of rate cuts even if the U.K does avoid a no-deal Brexit. This move is also aligned with the U.K’s current weak economic prospects, driven by poor views of the region’s export-led manufacturing sector. Additionally, the ECB’s move to aggressively spur growth through monetary means have driven the single currency lower against the U.S. dollar; the EUR/USD was 1.0939 at the end of the week. This has drawn the ire of Trump, who has criticised the Federal Reserve for not aggressively cutting rates. As expected, the low global economic growth and central bank intervention narrative has continued to hamper global currency strength.
Source: The Conversation
Sources: Financial Times, The Wall Street Journal, Reuters, FX Street, OilPrice.com, NBC News