Weekly Market Update

04/03/2019

Geopolitical developments added to the sense of unease last week. There was caution following negative comments from Donald Trump’s top trade official over the US-China trade dispute, while the summit between the US and North Korea ended abruptly and tensions between India and Pakistan lingered on.

The UK government continued negotiations in Brussels aimed at securing changes to the Northern Ireland backstop as it tried to get a Brexit deal that can make it through the Commons. Some Brexiteer MPs, including Jacob Rees-Mogg and Dominic Raab appeared to soften their opposition to Theresa May’s Brexit deal. The pound strengthened on Brexit positivity, with the more domestically focused FTSE 250 index delivering some strong returns

The US economy expanded at an annualised rate of 2.6 per cent in the fourth quarter beating analysts’ expectations of 2.2 per cent, although it still slowed compared to the previous quarter. Growth was helped by a 2.8 per cent rise in consumer spending, but that’s a slower rise than 3.5 per cent in the third quarter. The Federal Reserve did announce that it would stop shrinking its $4 trillion balance sheet later this year. The Fed is determined to keep rates unchanged, as it gauges how heavily slowing growth in China and Europe, coupled with dwindling fiscal stimulus, will drag on the US in 2019.

A private survey on China’s manufacturing sector showed that factory activity shrank for a third-consecutive month in February, but markets reacted with optimism as it bounced off lows. Meanwhile, Japan’s industrial production fell at its fastest pace in a year in January as the motor vehicle and electronics sectors posted declines.

China’s shares were lifted following MSCI’s announcement that they were going to quadruple the number of A-shares in its major benchmarks to 20 per cent in 2019, a year after the initial inclusion of Chinese onshore stocks. A-shares currently make up around 0.8 per cent of the Asia Pacific ex Japan and Emerging Markets indices as well as 0.1 per cent of the broader MSCI All Country World index. Given this latest move, if fully included, China A-shares would account for more than 16 per cent of the MSCI Emerging Markets Index.

As China’s representation in global indices grows, so the number of foreign institutional funds passively tracking these benchmarks will as well. The entry of more long-term capital to the market will expose local company managements to global standards of accountability and best practice. This will help to raise governance standards over time.

As data showed that the number of cars made in the UK fell for the eighth month in a row in January, Tesla announced that it is closing all its stores in a cost-cutting measure, so it can lower the starting price of its Model 3 to $35,000. Founder Elon Musk said that a shift to selling online only was essential to make it financially viable to lower the current starting price of $42,900.

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