The Market this Week: 11 February

By Gary Mullins 

Correspondent, Economics Undergraduate 

Monetary policy, State of the Union address and the Venezuelan sovereign debt crisis

This week saw a number of central banks retreat from plans to tighten monetary policy – a jarring contrast from the macroeconomic mood this time last year. Volatile financial markets, slowing economic growth and trade ructions were cast as the foremost reasons for Federal Reserve chairman Jay Powell’s decision to maintain rates last week. Mr Powell has decided to deviate from the maxim of a steady, gradual increase in rates – instead trying to assure investors that the optimal course of action is to be “patient in evaluating the outlook before making any future adjustment to policy”. As a consequence of being the largest economy in the world, the impact of US monetary policy is always far reaching. Following the Fed’s unforeseen policy U-turn, the UK, India and Australia were among the biggest economies to opt for a more dovish stance on monetary policy. In times of economic uncertainty, central banks are reluctant to increase interest rates and instead maintain or reduce rates in an effort to stem any uncertainty from snowballing into a real crisis. Lower interest rates encourage investments, which in turn, stimulate the economy.

Following a five-week government shutdown, president Donald Trump gave a decidedly insipid and highly choreographed State of the Union address earlier this week. Although Mr Trump is clearly still fixated on his proposed $5.7 billion border wall with Mexico, analysts were relieved that the obstinate president did not declare a state of emergency. If he had chosen to do so, Mr Trump would have the power to circumvent Congress in appropriating money to fund the wall – a decision that would have instigated huge backlash from the Democrats. On a more positive note, Mr Trump announced that he would meet North Korean dictator Kim Jong Un at the end of February. The relationship between the US premier and the North Korean despot has deteriorated in recent months. However, the promise of a meeting in Vietnam is seen by many as a positive move in the resuscitation of the Korean denuclearisation effort.

Elsewhere, European powers have followed Mr Trump in backing Jaun Guaidó as Venezuela’s interim president. Under the tyrannic rule of Nicolás Maduro, Venezuelan GDP has fallen by 50 per cent in the last year and inflation is believed to have hit an astonishing 1.7 million per cent – although the government has long stopped providing official figures. As one of the world’s largest oil producers, analysts are fretting about the impact on the supply of the commodity. Chinese and Russian officials have antagonised the problem by declaring support for Mr Maduro and his military-backed dictatorship.

hyperinflation

Equities

Earlier in the week, US and European stocks recorded two-month highs against the backdrop of a strong corporate earnings season. However, Mr Trump quickly ended the rally after announcing that he would not meet Chinese president Xi Jingping before March 1. The date is significant for investors because it marks the end of a 90-day truce between the two nations, after which tariffs on over $200 billion worth of Chinese exports will increase from 10 per cent to 25 per cent. The S&P 500 ended the week up 0.05 per cent. The tech-heavy NASDAQ rallied on Monday and Tuesday before ending the week flat.

Elsewhere, the European Commission cut its economic growth forecast from 1.9 per cent to 1.3 per cent. The gloomier prediction matches the broad deterioration throughout the Eurozone in recent months – with Brexit, Italian populism and a German economic slowdown being the primary concerns for investors. Following the announcement on Friday, the Europe-wide Stoxx 600 fell 0.7 per cent, with Frankfurt’s Xetra Dax 30 losing 1.2 per cent overall. London’s FTSE 100 slipped 0.6 per cent.

Asian markets had a subdued week, with many markets closed for the lunar new year break.

Fixed-Income

Bond markets rallied worldwide this week amid central banks opting for more dovish monetary policy measures. With central banks on course to maintain interest rates in the immediate future, the positive shift in demand for bonds has elevated bond prices. A central bank’s low interest policy makes relatively high-yielding bonds an attractive investment and thus bond prices tend to rally. The yield on 10-year US Treasuries, as well as the UK, German and French equivalent, ended the week down by several basis points. Bond yields and prices are inversely related, hence a rally in bond prices results in a fall in yield.

Forex

The Euro suffered the biggest weekly fall since September 2018 after a series of economic data published this week pointed to a slowing Eurozone economy. The currency fell 1.1 per cent against the dollar to $1.1323. The pound ended flat after another volatile week; suggesting that investors are struggling to weigh-up the numerous permutations of the Brexit negotiations.

Elsewhere, the Australian dollar lost 1.7 per cent against the US dollar on Thursday after the Reserve Bank of Australia introduced the possibility of a rate cut. If the interest rate on Australian debt were to fall, alternative foreign debt would become relatively more attractive for investors. The ensuing outflow into foreign markets would reduce demand for the home currency and prices will fall accordingly.

Commodities

Brent Crude, the international benchmark, ended the week slightly lower at $62.10 a barrel. Prices got a lift from a bullish report on US crude and gasoline inventories as well as Opec announcing that it may ratchet up its supply cuts later this year. More generally, reducing the supply of a good, increases its scarcity and the price rises to reflect this scarcity. However, the price rally was quelled in Thursday and Friday’s trading, most likely due to the reports from the IMF, World Bank and many central banks warning of an ailing global economy. Such a slowdown would reduce global demand for oil and the price may fall accordingly.

The Week Ahead

US, China and UK inflation figures are due to be released next week. Amid growing concern about the world economic outlook, analysts will be looking for signs of further deterioration. The data is of particular importance as many central banks recently halted their plans for a gradual hike in rates.

On Thursday, UK prime minister Theresa May is due to attempt to get the Brexit Withdrawal Agreement through Parliament. As the March 29th deadline for Britain to leave the EU fast approaches, whatever the outcome of the vote, financial markets are predicted to be volatile.


Photo provided by TradingEconomics.com

 

References

Weekly Market Overview, FT:
https://www.ft.com/content/44471d16-2b49-11e9-a5ab-ff8ef2b976c7
https://www.ft.com/content/49fbc9b0-2a71-11e9-a5ab-ff8ef2b976c7
https://www.ft.com/content/2e01a088-29ac-11e9-a5ab-ff8ef2b976c7
https://www.ft.com/content/70f166a4-28ed-11e9-a5ab-ff8ef2b976c7
https://www.ft.com/content/7d032b94-281b-11e9-a5ab-ff8ef2b976c7

Central Bank Policy:
https://www.ft.com/content/24508f0e-2b91-11e9-88a4-c32129756dd8
https://www.ft.com/content/2565e154-24b7-11e9-b329-c7e6ceb5ffdf

State of the Union address:
https://www.ft.com/content/4b8d6496-2a30-11e9-a5ab-ff8ef2b976c7

Venezuelan economic crisis:
https://www.ft.com/content/10b80c08-286a-11e9-a5ab-ff8ef2b976c7

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