However, this hides the sharp falls seen in currency markets this week, as the US dollar index has risen to levels not seen since July 2017. The standout currency move over the week was the Turkish lira, which fell over 14% versus the dollar, or 40% over one year, after a Turkish delegation to the US failed in its bid towards lifting US sanctions.
Following China’s threat to impose new tariffs on $60bn worth of US imports last week, the US confirmed that it would impose tariffs on a further $16bn of Chinese imports from August 23rd. China’s commerce ministry responded in kind, announcing 25% duties on $16bn of US goods including oil products, steel and cars. Since both sides-imposed tariffs on $34bn worth of each other’s goods last month, a total of $100bn worth of bilateral trade will now be subject to tariffs. The fortune of each other’s stock markets though, has been markedly different, suggesting investors believe there will be a clear winner. The Shanghai Composite index has fallen to within whispering distance of the lows seen in January 2016. Whilst the S&P 500 has recovered from its 10% fall at the beginning of the year, trading near to a record high.
The US stock market continues to be buoyed by strong earnings, with 79% of the 413 companies within the S&P 500 that have reported earnings so far this earnings season, having beaten expectations. Inflation has yet to become problematic too, with the latest Produce Prices Index (PPI) at a headline level coming in unchanged for July, versus expectations of a 0.2% increase. However, stripping out more volatile items such as food, energy and trade services, PPI rose 0.3% over the month.
Sterling fell to levels not seen in over a year versus the dollar, on growing concerns of a “no deal” exit from the European Union, now trading at $1.27. However, despite the threat of a hard Brexit hanging over the economy, the weakness in the currency helped the FTSE All Share to rise by 0.4% as overseas earnings are translated back into higher sterling profits.
The recent weakness in Sterling on the back of growing hard Brexit fears has helped portfolio performance in recent days, as our overseas holdings have risen in value. At $1.27 to the US dollar, we are discussing whether much of the ‘fear’ is priced in and at what level we may start to reinstate hedging our overseas assets into sterling.
A sharp fall in German manufacturing output for June was revealed at the beginning of the week, fuelling concern that the global trade war has deepened an export led slowdown in the Eurozone. Manufacturing new orders fell by 4% over June, with the value of new orders falling by 1.7% over the 2nd quarter, following a 2.2% fall in the 1st quarter. This continued weakness has poured cold water on the idea that the slowdown at the beginning of the year was due to the harsh winter. This was swiftly followed by news that Germany’s industrial production fell by 0.9% in June, worse than forecast, with the production of consumer goods hit particularly hard. However, versus the same month a year earlier, exports have actually risen by 7.8%, whilst imports climbed 10.2%. Nonetheless, this helped the Euro to weaken to levels not seen versus the US dollar since July of last year, now trading at $1.14.
The Russian rouble fell to its lowest level for more than two years as the US announced fresh sanctions on Russia in response to the nerve agent attack against a former Russian spy in the UK in March. This could hit hundreds of millions of dollars’ worth of Russian state imports, as they are denied import licenses for technologies that could potentially have military applications. These sanctions are scheduled to take effect on the 22nd August, and more draconian measures could follow if Russia does not provide reliable evidence that it is no longer using chemical or biological weapons.
Crude oil started the week on a high, as the US confirmed it would reimpose economic sanctions on Iran, and news of an unexpected drop in Saudi Arabian oil production in July. However, this was rapidly reversed on Wednesday as the US reported a smaller than forecast fall in crude inventories, pushing Brent crude oil down by over 3%. Brent crude is currently trading at $72.5 a barrel, whilst WTI (West Texas Intermediate) is trading at $67.2.
Taken as a whole, emerging market currencies fell by 3.4% versus the US dollar this week as measured by the JP Morgan Emerging Market Currency Index. However, the MSCI Emerging Market Currency Index which has a much higher weighting towards Asian currencies only fell by 0.15%.
Shares in Tesla, the pioneering US electric carmaker soared by 11% this week as Elon Musk took the opportunity to declare via Twitter, that he wanted to take the company private, shortly after the Financial Times revealed that Saudi Arabia’s sovereign wealth fund had built a $2bn stake in the company. According to data from Markit, Tesla is one of the US’s most shorted companies, with 27% of the company’s shares out on loan to investors betting that its share price will fall. The sharp rise in the share price on Tuesday resulted in a paper loss of $823m on the short positions in the company, although the shares have since fallen again as investors have questioned Elon Musk’s ability to finance such a deal.
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