Last week was a choppy one for equity markets but global equities still ended up 1.0% in local currency terms and 0.5% in sterling terms. US equities did best, gaining 1% in sterling terms but mainly because this included a rebound from their drop the previous Friday which other markets had avoided. Chinese equities fared worst falling 4.4% and unwinding some of their outperformance over the previous couple of months.
Bonds, particularly UK gilts, had a good week with the latter seeing yields falling 0.15% or so and returning 1.0%. As for gold, even by its recent standards, it had a stellar week with the price breaking through $4200/oz and up as much as 5.9%.
The renewed outbreak of trade tensions between the US and China was a source of volatililty with the mood music changing by the day. Importantly and not unexpectedly, Trump backtracked from his recent hostile comments, even saying that he’s not looking to hurt China and that everything will be fine. We stick to our view that an uneasy trade truce should continue to prevail with both sides backing down from the most extreme restrictions on exports of rare earths and chips respectively.
The US banks were another major focus with the big banks kicking off the third quarter reporting season last Tuesday. They reported bumper results with most areas of their business performing well but investment banking particularly so on the back of the revival in M&A activity. S&P 500 earnings are overall forecast to be up 9% this quarter on a year earlier. This would be down from the 14% growth seen in the last two quarters but very likely earnings will beat consensus expectations as they usually do.
Bizarrely, cockroaches were also a topic of market discussion following a comment by Jamie Dimon, Head of JPMorgan, that when you see one cockroach, there are probably more lurking around. He was referring to the recent bankruptcies of a US auto lender and auto-parts supplier and suggesting their demise might be an indication of more problems lurking beneath the surface.
Worries on this front were then increased further by two US regional banks disclosing issues with fraudulent loans. All of this inevitably brings back memories of how the implosion of a couple of US hedge funds in 2007 were the canaries in the coalmine (a rather more pleasing analogy than the cockroach one) of the impending Global Financial Crisis.
Still, the evidence at the moment is very much that, while lending standards have undoubtedly fallen too far in pockets of the credit market as a result of the ton of liquidity chasing returns, there is no systemic problem. Even if further cockroaches do appear as is very likely, as long as there isn’t a recession of which there is no sign, corporate default rates (which are currently very low) should remain low enough not to trigger more widespread problems for the markets.
The macro news remains limited with the US government shutdown continuing to curtail US releases. However, this morning saw the latest clutch of Chinese economic data released. GDP grew 1.1% in the third quarter, the same as in the second quarter, but the growth rate over the past year continued to slow, slipping to 4.8% from 5.2%. Growth continues to be very lop-sided, propped up by exports with retail sales slowing further in September.
Here in the UK, the GDP numbers for August provided few surprises with activity up 0.3% over the previous three months, confirming a picture of continued positive but sluggish growth. Instead, the good performance of the gilt market was more down to the Chancellor mentioning that she was looking at spending cuts as well as tax hikes in the November budget and talk that she would raise the amount of headroom against her fiscal rules.
Comments by BOE Governor Bailey that the softening in the labour market should reduce inflation pressures also helped although the next rate cut still looks likely to have to wait until February. Over in the US, Fed Chair Powell was also emphasising the downside risks to employment, making a further 0.25% reduction in rates next week all the more likely.
This coming week, inflation numbers for the UK on Tuesday and for the US on Friday will be the major focus. But US, UK and European business confidence data are also released on Friday. Finally there is the meeting of the Chinese Communist Party which has just got underway and will be signing off the next 5-year development plan.
Rupert Thompson – Chief Economist