In this week’s market update: shares post a bullish start to the year; China’s in focus as the Year of the Rat arrives; and here in the UK, soft data point to another rate cut.
Shares on both sides of the Atlantic are close to all-time highs after growth figures in China, despite being the lowest since 1990, point to the relative health of the world’s second biggest economy.
Wall Street reached a new peak, closing above 3,300 for the first time at the end of last week, with support for US shares coming from an apparent easing in trade tensions, steady consumer sentiment and housebuilding rising to its highest level since before the financial crisis. Manufacturing output also improved in December, contradicting expectations of a fall.
That confluence of good news helped all three of the main US stock market indices report their best weekly performance since August. The S&P 500 was up 2% on the week. Yesterday the US market was closed for Martin Luther King day.
The good news was mirrored on this side of the pond too, with European shares notching up four consecutive up days last week. In the UK, shares were also buoyant, although here weakness in the pound also played its usual role. British shares tend to do well when sterling is falling thanks to the high weighting of exporters and overseas earners in the UK benchmark.
The pound is wobbling at the moment on the back of rising expectations that the Bank of England is poised to cut interest rates again from their current 0.75% to just 0.5%, close to the low point for the past 300 years.
The Bank meets next week to decide on interest rates and the odds of a cut have risen in recent days to more than 50% as a string of disappointing data has underlined the impact of political uncertainty on the British economy.
Britain’s retail sector, in particular, is suffering from a lack of confidence. The contraction in the sector’s activity in December marked the worst spell of flagging growth since the 1950s. The pound fell to $1.30 on the news, having been as high as $1.35 in the aftermath of the unexpectedly large Conservative victory in December’s general election.
The pound has weakened to such an extent that many speculators are now betting that the next move could be up. The number of investors with long positions - ie expecting a rise in the pound - is at its highest for nearly two years. But a lot will depend on how the next 11 months negotiations with the EU go. Chancellor Sajid Javid was this week setting out the ground rules for that process, making it clear that the UK intends to take a hard-line position on regulatory alignment. That opens up the possibility of a hard Brexit in December and would be negative for sterling.
Back to China. The Chinese growth data at the end of last week showed growth in GDP of 6.1%. That was the lowest rate for 30 years but still leaves the Chinese economy expanding much faster than its counterparts in the developed West. Britain’s growth in the 12 months to November, by contrast, was less than 1%. The Chinese growth figures set the scene for the Year of the Rat, which begins on Saturday.
The Bank of England is not the only central bank weighing up the domestic economic outlook in the next few days. This week, the ECB is in focus as Christine Lagarde, its new President, gets her feet under the desk after eight years under her predecessor Mario Draghi. He left a divided ECB rate-setting committee after setting out a package of easing measures that were not unanimously supported by his colleagues.
Ms Lagarde kicked off a review of the ECB’s monetary policy framework which is due to conclude by the end of this year so investors will be watching closely for any hints as to the direction of travel for the European Central Bank. It is thought that she is not so wedded to the ECB’s pledge to keep interest rates at their current level or lower until inflation picks up.
Other central banks to make announcements this week include the Bank of Japan and Canada’s central bank. In Japan, a significant contraction in fourth quarter GDP is expected as the impact of Japan’s VAT hike from 8 to 10% feeds through into the data. A recent survey showed that the Japanese public is concerned that the impact of the rate hike will continue into this year. That in turn makes the Bank of Japan’s hopes of restoring some inflation to Japan’s stagnant economy ever more a case of wishful thinking.
Whether that leads to any further monetary stimulus is a moot point. Rather it is thought the government has a package of fiscal spending measures waiting to be unveiled in the spring.
Another ongoing focus this week is the fall-out from the signing last week of a phase one trade deal between the US and China. With tariffs of 25% still in place on $250bn of Chinese exports to America still in place, it’s not all smiles between the two countries and a number of unanswered questions remain around intellectual property, for example.
With the US President focused on re-election in November, and with an impeachment trial hanging over him, it is far from clear that further trade deals with China are top of the agenda for Donald Trump.
On the corporate front, things are picking up pace this week as last week’s better than expected start to US earnings season broadens out from the banks which typically start things off. This week, around 40 companies in the S&P 500 are due to report numbers, with releases pencilled in from Netflix, Johnson & Johnson, Intel, IBM and three airlines, United, Southwest and American.