Investors showed signs of relief as damage from Hurricane Irma was not as bad
Equity markets by and large recovered some ground last week, as investors showed signs of relief that damage in the United States from Hurricane Irma was not a bad as originally feared. And while tensions between North Korea and the United States and its allies remained in the headlines, investors seemed more accepting of the situation. The UK equity market was a notable outlier, however, ending the week down after hawkish commentary from the Bank of England hit UK-listed exporters.
Events in the United Kingdom were in focus last week as the pound climbed to its highest levels since the Brexit slump. Driving this surge were some encouraging macro data and, more importantly, some hawkish commentary from the Bank of England (BOE).
Macro data generally set a positive tone ahead of the BOE Monetary Policy Committee meeting. UK inflation delivered an upside surprise in August, with a jump in the headline consumer price index (CPI) from 2.6% to 2.9% (versus a consensus expectation of 2.8%).
Further positive surprises came from UK House Price Index data showing an increase of 5.1% versus consensus estimate of +4.8%. UK August Output producer price index (PPI) also came in ahead of expectations at +3.4% year-on-year versus consensus of +3.1%. The only fly in the ointment was some disappointing wage growth data, but overall the tone from UK macro data last week was positive.
As expected, the BOE monetary policy committee kept UK interest rates unchanged.
However, the BOE stated that unless macro data worsens, “some withdrawal of monetary stimulus is likely to be appropriate over the coming months”. This statement saw sterling rally sharply as expectations increased for an interest-rate rise at the next BOE meeting on November 2.
To round the week off, Gertjan Vlieghe, traditionally seen as a dovish member of the BOE monetary policy committee, made a hawkish speech on Friday in which he said: “We are approaching the moment when the bank rate may need to rise.”
On the back of this commentary, the pound gained 3% on the week against the dollar, closing at its highest level since the Brexit vote.
However, the FTSE 100 Index underperformed last week. Exporters which have benefitted so much from the weaker pound traded lower.
BOE Mirrors Fed and European Central Bank Approach
By indicating an intention to gradually move away from the easing bias, it is interesting to see the policy of the BOE broadly following the US Federal Reserve (Fed) and European Central Bank (ECB). That said, if the BOE does raise rates in November, it would only a reversal of the rate cut in the immediate aftermath of the Brexit vote, and interest rates will still be very low versus historic levels.
Attention Turns to the Fed
Focus now turns to the Federal Open Market Committee (FOMC) Meeting in the United States this week. No change in interest rates is expected; however, we may see further clarity around the proposed reductions to the Fed’s balance sheet.
In addition, expectations of a further US rate hike later in the year have edged higher again after the impact of hurricanes Harvey and Irma in the United States were not as severe as expected.
With the exception of the United Kingdom, European equity markets closed higher across the board last week. They appear to have been boosted by risk-on sentiment after Founders Day in North Korea passed without incident and less-than-feared damage to Florida from Hurricane Irma.
The euro had a quieter week, closing down 80 basis points. Dovish commentary from ECB board member Benoît Cœuré helped drive the softer performance. He reiterated that monetary policy was likely to remain on the accommodative side for longer.
From a sector perspective, retail names outperformed on the back of some strong stock-specific moves. Autos were also strong, driven by China’s plan to ban the production and sale of diesel and petrol cars, encouraging the replacement cycle.
Basic resources names underperformed globally last week. Earlier gains were reversed as data from China suggested that the economy was slowing.
On the macro-data front, Italy saw stronger-than-expected industrial production data, while business sentiment in France came in worse than expected. There was a wealth of CPI data from the region, but in our view, there were no real surprises.
There were some significant headlines regarding Brexit last week. On Monday, the UK Parliament voted on the EU Repeal Bill in a special late-night sitting. The Bill was passed, as expected, strengthening Prime minister Theresa May’s power to deliver her plan.
Alongside this, the United Kingdom and the European Union postponed a new round of Brexit negotiations by a week until the end of the month in order to allow time for May to make a key speech this Friday (September 22) outlining her approach. The next crucial stage will be in October, with an eight day committee scheduled to scrutinise the finer details.
US equity market indexes set new all-time highs last week, as risk-on sentiment dominated following an uneventful North Korean Founders Day and the downgrading of Hurricane Irma.
Projected storm losses were significantly reduced to $40 billion, in comparison with an earlier projection of $170 billion.
By sector, the energy space was strong with West Texas Intermediate (WTI) crude oil trading above $50 a barrel late last week. Financials put in a decent performance as yields rose along with rate-hike expectations. Autos also outperformed, following a similarly strong performance in Europe and China.
On the macro front, US CPI data was the main release. The headline figure beat expectations for the first time in six months, which in turn boosted rate-hike expectations.
Tax reform was back in the spotlight last week, with reports that President Donald Trump’s advisers and key congressional leaders were working to put together a tax reform framework that could be released soon.
Reports suggest divisions remain about how to pay for the aggressive tax cuts that Trump has promised.
Japan’s equity market was a standout performer in the Asia-Pacific region. As risk-on sentiment took hold, the yen lost its safe-haven allure and contributed to the move in equities. There was also some positive news on the political front, Japanese Prime Minister Shinzo Abe’s approval rating moved up eight points to 50%.
Important inflation data emerged from China to start last week. Better-than-expected CPI and PPI helped spur gains in base metals and basic resource companies. Later in the week however, August industrial production missed expectations and retail sales slowed. These data raised concerns that the Chinese economy may be slowing, leading to a reversal in the gains of base metal companies and the underlying commodities earlier in the week.
In Australia, macro data continued to be mixed to weaker last week. Employment data was better than expected, although this positive was offset by comments from Reserve Bank of Australia Board Member Ian Harper, who suggested the nation’s economic growth was not yet strong enough to justify a rate hike.
An uneventful North Korean Founders Day boosted risk sentiment across the globe, but then the country launched a second test missile over Japan on Friday morning. Despite this, markets were resilient and continued their move higher after a brief knee-jerk reaction.
What Are the Risks?
All investments involve risk, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in developing markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity.
Past performance is not an indicator or guarantee of future performance.
Article by the Trading Desk: Franklin Templeton