Once again global trade set the tone for investors this week. At first, markets maintained their upbeat mood on the back of positive talks between Mexico and the US, in their efforts to revamp NAFTA (North American Free Trade Agreement). Both countries agreed stricter rules for Mexican car exports to the US, whilst farm products remain tariff free. NAFTA’s third trade party, Canada, also resumed talks with the US, with hopes that any new agreements can be reached by today. The initial positive sentiment helped the S&P 500 finish at a record close of 2,914 on Wednesday. However, at the end of the week, markets were hit by threats from US President Donald Trump, to pull the US out of the World Trade Organisation, coinciding with reports that Washington also plan to impose new tariffs on $200 billion of Chinese imports. Despite the setback to markets, the S&P 500 finished the week trading 0.92% higher as of 12pm London time, although, in Europe, the FTSE All Share traded lower by 0.93% whilst the Eurostoxx 600 fell 0.14%. The Japanese Topix also ended the week in positive territory by 1.53%.
Amongst the notable data releases this week, Eurozone inflation remained on track with the European Central Bank’s target of
just under 2% year on year. A surge in oil prices was the key contributor to keeping headline inflation at 2% annually for August,
slightly lower than the 2.1% figure recorded in July. However, core inflation, which excludes volatile components of energy and
food prices, remained weaker at 1% year on year. Data from Eurostat also showed Eurozone unemployment remaining stable
Meanwhile, in the UK, Sterling jumped higher by approximately 1% midweek, after Michel Barnier, the EU’s chief Brexit negotiator, indicated he was close to offering the UK a better deal than with ‘any other’ non-EU country. Sterling broke above $1.30 against the dollar.
Core government bond yields, which move inversely to their bond price, were overall largely unmoved over the week. The US 10-year Treasury yield rose just four basis points and equivalent 10-year German bund yields increased by only one basis point. Amongst periphery sovereign bonds, investors are looking ahead to upcoming budget talks in Italy. The Eurosceptic coalition government could seek to defy EU public spending restrictions, and the uneasy sentiment has been reflected in rising Italian bond yields. Italian government bonds sold off further this week as the difference between 10-year Italian yield and the 10-year German Bund widened as much as 15.7 basis points by Thursday, according to Reuters data.
Pressure on emerging market currencies dominated headlines this week, after drastic action by Argentina’s central bank failed
to stop a plunge in the peso. The currency sold off on Wednesday, after President Macri surprised investors by asking the
International Monetary Fund to speed up the release of its funds to assist the economy’s financing needs. The Peso closed
Thursday’s session down 12% versus the US dollar, despite the central bank ramping up interest rates by 15% to 60%, in an
effort to support the currency. The Turkish Lira was the other hardest hit currency as it reaches a three-week low, after another
3% drop on Wednesday amidst ongoing concern with President Erdogan’s management of the economy. The broader JPM
Emerging Market Currency Index declined 1.99% over the period.
Chinese manufacturing edged up in August, as the purchasing managers’ index increased marginally to 51.3 in August, ahead of expectations of 51. A reading above 50 indicates economic expansion. Moreover, whilst production increased over the month, new export orders declined at their fastest pace in six months, amid ongoing trade tensions.
Elsewhere, the Australian S&P/ASX 200 rebounded from last week’s political turmoil finishing the week 1.16% higher. The Australian dollar meanwhile, dropped 0.9% on Thursday to $0.7283 given new data showing capital expenditure in the economy had fallen by 2.5% in the second quarter.
The price of Brent crude oil finished the week higher by 2.15%, to $77.45 per barrel. Prices rallied on Wednesday, after data from the Energy Information Administration, showed US crude stockpiles dropped 2.6 million barrels last week to 405.79 million barrels.
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