Weekly Market Update

10/07/2017

Ripples created by central bank policymakers softened allowing equities to rebound towards the end of the week. Meanwhile, the wave of bond selling at the prospect of the reduction of the ECB’s monthly €60bn stimulus spending also witnessed some price stability.

The US Federal Reserve minutes highlighted that policymakers appeared divided over the timing of any balance sheet reduction, with some concern that allowing unemployment to fall too low would lead to the US economy overheating. However, the prospect of tighter policy has provoked an anxious mood in financial markets, following years of companies being able to refinance cheaply. Central banks will continue to prepare markets over the coming months as they look set to reverse the stimulus put in place following the 2008 financial crisis. Ultimately the stimulus will be reversed, it is just a matter of timing as policy makers continue to assess economic activity and inflation expectations.

Elsewhere, the European Central Bank minutes were eagerly awaited, with investors looking for signs that policymakers were set to reduce their quantitative easing programme. Again, the messages were mixed. While the minutes suggested that the Eurozone would reach its medium-term inflation target of around 2 percent if current conditions persisted, it reiterated the message that the bank would also increase bond buying if needed. Nevertheless, investors continued to position themselves for the withdrawal of stimulus measures, sending bond prices lower.

China and Hong Kong launched a bond trading link bringing China’s debt market closer to the international community. The Bond Connect will allow foreign managers to trade in China’s $9tn government, agency, and corporate debt markets without, having to set up onshore accounts. Similar to the Stock Connect already running between Hong Kong, Shanghai, and Shenzhen, it is likely to help China win inclusion in global indices. Although certain restrictions remain including the exclusion of hedge funds, net inflows to China’s bond markets could reach Rmb100bn ($14.8bn), by the end of this year through the Connect and existing schemes.

Swedish carmaker Volvo announced last week that from 2019, it would only produce pure electric and hybrid cars. Global sales of electric cars amounted to less than 1 per cent of the market last year, but are expected to grow rapidly. Following Tesla impressive record, General Motors will launch ten electric models by 2020, while Toyota announced its ambition to mass-produce by 2020. However, some doubts lie over the viability of this given that Tesla has yet to turn a profit given its large expenditure on research and development.

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