The Market this Week: 25 February

By Gary Mullins 

Correspondent, Economics Undergraduate 

Stocks rally following positive US-China trade talks

There was a broad rally in equity markets this week, fuelled by optimism over US-China trade discussions and Federal Reserve officials indicating that the central bank was generally in favour of a “patient posture” on interest rates.

On Friday, President Trump announced that he would meet with one of China’s top trade negotiators before March 1st. 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 to 25 per cent. In addition to Mr Trump’s intended meeting, Liu He, Chinese vice-premier, was in Washington on Thursday and Friday to conduct talks with Robert Lighthizer, US trade representative, and Steven Mnuchin, US Treasury secretary. Other sources of optimism came from the President’s announcement that the two sides had come to an agreement on China’s currency and that the US would take a more lenient approach to the Huawei national security debacle. Mr Trump suggested that Huawei, a Chinese telecommunications equipment and consumer electronics manufacturer, could be included in a final trade deal, although he remained steadfast in pressing charges against the conglomerate over allegations that it stole US technology and broke sanctions against Iran. Equities either side of the Pacific rallied this week against the backdrop of broadly positive trade discussions.

Equities

The S&P500 stock index ended the week up 0.9 per cent and the CSI 300 index of major Shanghai stocks experienced similar gains. The CSI 300 index has amassed over 14 per cent so far this year, having plummeted by well over 20 per cent in 2018. The resurgence provides a strong indication that investors can see through US-China sabre rattling and believe that an all-out trade war is unlikely. Elsewhere in Asia, the Hong Kong Hang Seng and Japan’s TOPIX jumped 2.5 and 1.5 per cent this week, respectively.

shangai shenzwen

Elsewhere, shares in Kraft-Heinz, the fifth largest food and beverage company in the world, fell by over 27 per cent after the conglomerate announced that it is facing some serious problems. Amongst the biggest causes for concern: the company reduced its profit forecast, cut its dividend, revealed that it had received a subpoena from the Security and Exchange Commission regarding its accounting policies and a $15.4 billion write-down in goodwill.

In the UK, the FTSE 100 index was not part of the equity rally, finishing the week 1.1 per cent lower. The index consists of UK blue chips but it is estimated that about three quarters of the constituents’ revenue is generated abroad. Thus one of the headwinds facing the index is a stronger pound. When the pound appreciates in value, the foreign-denominated revenues become relatively less valuable in real terms. The index was further dragged down by a 9 per cent drop in BAE shares, a defence and security contractor, following Germany’s announced ban on arms exports to Saudi Arabia. Centrica, the owner of British Gas, plummeted by 12 per cent following an announcement that it would not meet it’s cashflow targets for the year.

Elsewhere in Europe, the continent-wide Stoxx 600 index, Germany’s Dax and France’s Cac 40 all ended a bullish week strongly.

Fixed Income

Fixed income markets were relatively subdued this week. On Wednesday, the Federal Reserve announced that it intends to hold a much larger balance sheet than before the financial crisis in 2008. In recent months, the central bank has faced increasing pressure from investors and Mr Trump to opt for a more dovish monetary policy stance. The aforementioned US-China trade tensions, a global economic slowdown and Brexit-related turbulence are the foremost headwinds to the global economy. During the last economic crisis, the Federal Reserve initiated the so-called Quantitative Easing policy, in which the central bank bought huge amounts of government bonds and other financial assets in an attempt to stimulate the ailing economy. In recent years, the Fed has began to unwind the expansionary policy and increase interest rates as the world economy continues on its recovery. The recent announcement that the Fed will maintain a large balance sheet indicates that the central bank deems it necessary to support the economy by way of lower interest rates and asset purchases. The yield on 10-year US Treasuries fell 4 basis points to 2.65 per cent following the announcement.

Elsewhere, other Sovereign bonds were largely flat for the week.

FOREX

In currency markets, the Australian dollar had a tumultuous week. The currency was knocked by a report that the Reserve Bank of Australia could cut rates twice this year. Lower interest rates make Australian dollar denominated investments relatively less attractive for foreign investors. Capital thus flows out of Australia and into higher-yielding foreign investments. The reduction in demand for Australian dollar puts downward pressure on its price. The Australian dollar ended the week at 71c to the US dollar.

The onshore Chinese renminbi had a relatively volatile week as the prospect of a US-China trade deal continued to accelerate. The currency ended the week 0.5 per cent stronger at Rmb6.7213 against the dollar. The swings in the renminbi tend to be dampened due to the People’s Bank of China setting a daily midpoint, around which the currency can fluctuate by only 2 per cent. In the past, China has been accused of manipulating its currency to the detriment of foreign trading partners.

Commodities

On Tuesday, Brent crude oil – the international benchmark – edged to a three month high of $66.42 a barrel. Optimism over trade tensions and Saudi Arabia’s unexpected plan to reduce production further than expected, fuelled the strong performance. In general, when the supply of a commodity is reduced, it becomes relatively more scarce and the price rises accordingly.

Gold appreciated slightly this week, finishing at £1,328 per troy ounce.

The Week Ahead

President Trump is due to meet North Korean leader Kim Jong Un for the second time to discuss the denuclearisation of the Korean peninsula. Little progress has been made since the first summit and many fear that, which such volatile leaders at the helm, no concrete forward steps seem likely. A year ago, both nations were nuclear armed and primed for war. Investors will be watching developments on this issue closely.

Prime minister Theresa May is due to hold another round of UK-EU Brexit negotiations. She remains steadfast in her belief that the UK will leave the EU on March 29th with or without a deal. Economists widely believe that a no-deal Brexit would be ruinous for the UK economy and those who rely on its trade flows. Labour MP Yvette Cooper is expected to launch an effort to extend Brexit talks if a deal cannot be made before March 29th.  With less than 1,000 hours until the deadline, financial markets are expected to react unfavourably to Mrs May’s attempt to run down the clock.


Photo provided by Investing.com

 

Refences

Global Markets Overview:
https://www.ft.com/content/25fbf682-3644-11e9-bb0c-42459962a812
https://www.ft.com/content/69a8aa4a-3579-11e9-bd3a-8b2a211d90d5
https://www.ft.com/content/b6e49a6e-34b9-11e9-bb0c-42459962a812
https://www.ft.com/content/608d8686-33eb-11e9-bd3a-8b2a211d90d5
https://www.ft.com/content/bf0b34ae-3311-11e9-bd3a-8b2a211d90d5

Fed Balance Sheet:
https://www.ft.com/content/a9d58b5e-36bb-11e9-bd3a-8b2a211d90d5

Trade Negotiations:
https://www.ft.com/content/16864d44-36c4-11e9-bb0c-42459962a812

Huawei:
https://www.economist.com/business/2019/02/21/america-and-its-allies-disagree-on-huawei

Kraft-Heinz:
https://www.economist.com/business/2019/02/22/kraft-heinz-is-in-trouble

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