Weekly Market Update

21/01/2019

A wave of positivity swept through markets last week as sentiment was underpinned by news that the US might consider easing trade tariffs against China, followed by positive comments from Chinese authorities over further stimulus measures. Investors in US companies were in a particularly optimistic mood. Robust earnings reports from Goldman Sachs and Bank of America helped to send the S&P 500 to its highest level for a month, with financials by far the strongest sector over the week.

US consumer sentiment dropped to its lowest level since October 2016, while US industrial output produced some stronger than expected figures in December. Policymakers at the central bank have recently signalled that they will await further data and move patiently before raising interest rates again, a response to market volatility and concerns over a global economic slowdown.

UK Prime Minister Theresa May suffered a humiliating defeat in parliament. The EU Withdrawal Agreement was voted down in the biggest losing vote for a government ever. However, the government defeated a no-confidence motion that would have resulted in a general election. Parliament will now vote on Mrs May’s Brexit plan B on 29 January, raising speculation of an extension of the Article 50 deadline, given the short timetable. In the currency markets, the pound was strong against the euro. This occurred as investors decided that a softer Brexit or even a second referendum was now more likely.

UK inflation fell from 2.3 per cent to 2.1 per cent in December, approaching its lowest rate for two years, following downward pressure from petrol prices and air fares. The steady fall towards the Bank of England’s 2 per cent target means the Bank’s Monetary Policy Committee (MPC) is unlikely to make any interest rate hikes in the near term, especially with Brexit unfolding.

China’s economic growth dropped to its slowest annual rate since 1990, falling to 6.8 per cent, as the US trade war continues to hit consumer sentiment. China has adopted a series of fiscal and monetary stimulus measures since July that have failed to reverse the deceleration. Last week, the finance ministry outlined plans for additional tax cuts, and it is likely that further stimulus measures will be implemented throughout the year, but this would leave policymakers with less flexibility to loosen credit, which would further swell the economy’s debt.

Germany’s economy grew at its slowest rate in five years during 2018, as global growth slowed. Europe’s-largest economy expanded by just 1.5 per cent last year, down from 2.2 per cent in both 2016 and 2017.

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