Money Matters 26th February 2019

The Federal Open Market Committee (FOMC) released the minutes from their January meeting. There was a mutual agreement for the FOMC to end the shrinkage of the USD 4tn balance sheet by the end of the year. Members are keen to let the effects of previous tightening play out in the economy but there were concerns that Brexit, Europe and China could weaken domestic growth in the US. The minutes showed that ‘many’ members on the committee were unsure whether any rate adjustments would be needed, with participants advocating a patient approach to future policy action.
United States 26 Feb 2019UNITED STATES
S&P 2,793 +0.62%, 10yr Treasury 2.67% -1.08bps, HY Credit Index 345 +2bps, Vix 13.98 -1.40Vol
The S&P rose by 0.6%, led by materials (+2.3%) and utilities (+2.4%). Energy and healthcare were the biggest detractors, declining 0.5% and 0.3%, respectively.
The U.S. is pushing China to keep its currency stable as part of the latest trade negotiations. The request aims to discourage officials in Beijing from devaluing the currency to offset the impact of sanctions. Both sides have cautiously decided that the issue will be included in the framework of any final deal but haven’t yet settled on the specific wording.
Looking forward: US GDP data is released next week.
Europe 26 Feb 2019EUROPE
Eurostoxx 3,280 +1.56%, German Bund 0.11% -0.50bps, Xover Credit Index 288 -9bps, USDEUR .881 -0.64%
The majority of European indices rose during the week. Germany and France led the pack, rising 2.1% and 1.6% in USD respectively. Italy (+0.9% in USD) and the UK (+0.7% in USD) rose modestly.
The manufacturing PMI index for the Euro Area dropped to below 50, signalling a contraction for Eurozone industry. Manufacturing PMI for Germany was especially weak, slowing to 47.6 as export orders had their steepest decline in more than six years. Furthermore, Germany’s most commonly followed measure of business sentimentthe Ifo Business Climate index, fell to its lowest level in five years. However, there is room for some cautious optimism as the composite PMI for the region came in at 51.4, with the expansion driven almost exclusively by the services sector. Meanwhile, France’s PMI jumped to 49.9, which was better than expected.
Looking forward: Spain, France, Germany and Italy release CPI inflation data. France also releases GDP data.
Asia 26 Feb 2019ASIA
HSCEI 11,631 +4.47%, Nikkei 21,528.23 +2.49%10yr JGB -0.04% 0bps, USDJPY 110.650 +0.02%
Asian markets rose considerably over the week. MSCI Asia Pacific ex. Japan index rose 3.2% in USD. China (Chinese ‘A’ shares +5.5% in USD), Hong Kong (+3.3% in USD) and Vietnam (+3.9% in USD) were especially strong. Pakistan and Sri Lanka lagged, declining 1.5% and 1.7% in USD, respectively.
Following the aggressive rate hikes in 2018, Indonesia’s central bank has kept rates unchanged at 6%. Given the relative strength of the Indonesian rupiah in 2019, this decision was largely expected. The central bank adopted a less hawkish tone, reiterating that its main objective remained preserving financial stability and reducing the current account deficit.
India’s exports grew 3.7% YoY to USD 26.4bn in January on account of growth in sectors such as jewellery, pharmaceuticals and chemicals, according to data from the commerce ministry. Imports almost remained flat at USD 41bn during the last month, narrowing the trade deficit to USD 14.7bn.
Thailand’s 4Q18 GDP growth was 3.7% YoY, beating consensus by 1ppt. However, Thailand’s trade deficit of USD 4bn was larger than expected. This was Thailand’s largest trade deficit since April 2013. The Bank of Thailand’s policy minutes noted that it expects any future policy tightening to be ‘gradual’ and ‘data-dependent’.
The Philippines reported a balance of payments surplus of USD 2.7bn in January, up from USD 2.3bn in December. The central bank commented that ‘inflows in January 2019 stemmed mainly from the National Government’s net foreign currency deposits, BSP’s foreign exchange operations and income from its investments abroad’.
In Singapore, the government expects an overall budget surplus of 0.4% of GDP in FY2018 (Apr-Mar). Singapore’s finance minister noted that the 2019 budget position remains expansionary, with an overall projected budget deficit of 0.7% of GDP.
Taiwan’s exports contracted for a third straight month in January, with export orders falling 6% YoY. Materials and parts used for manufacturing smart devices were especially weak; plastics declined 10.4% YoY, optical parts declined 11.4% YoY, and telecommunication parts declined 5.8% YoY. Last month, the Ministry of Economic Affairs said it was ‘not too optimistic’ that first-quarter export orders growth would be strong due to slowing demand for tech products.
Deflation returns in Malaysia for the first time since the global financial crisis. CPI inflation fell to 0.7% YoY in January, due to the 7.8% YoY fall in the transport component following the administrative cut in fuel prices. Core-CPI inflation was 0.2% YoY, slowing from 0.4% in December. Malaysia’s Finance Minister commented that ‘Strong economic growth numbers, with the economy expanding by 4.7 per cent in 2018, immediately dispels any deflationary fears following the drop in January 2019 CPI by 0.7 per cent, the lowest in nearly 10 years’.
Looking forward: Singapore, South Korea, Japan and Taiwan release industrial production data. India and Hong Kong release GDP data. Chinese manufacturing PMI is also released next week.
MSCI Lat Am 2,902 +0.66%
Latin American markets were a mixed bag during the week. The broad MSCI EM Latin America index rose only 0.7% in USD, lagging behind its peers within the EM space. Within the Latin American universe, the Chilean (+3.3%), Mexican (+2.8%) and Peruvian (+1.3%) markets gained the most, while the Argentine (-3.7%) and Brazilian (-0.6%) indices underperformed (all in USD).
The proposal for the pension reform was sent to Congress by the Brazilian government. In line with previous statements, the bill sets the minimum retirement age to 65 for men and 62 for women, with a transition period of 12-14 years. According to the government’s estimates, the proposal will reduce public expenditures by about BRL 1.2bn in the next 10 years. The bill is likely to be approved by the Lower House as early as the end of June.
The central bank of Mexico released the minutes from the February monetary policy meeting where MPC members unanimously voted for keeping the policy rate stable at 8.25%. There was consensus among the MPC members that the balance of risks is tilted to the downside in terms of future economic activity. However, there was no consensus on the inflation outlook, as some members believe that inflationary pressures might require a more hawkish response.
Consumer confidence in Colombia improved for the second consecutive month in January. The pick-up in the index was primarily due to the strengthening of the component for expectations, while the component for current conditions worsened.
As actual consumer spending remained healthy, and there are no signs of aggressive tax hikes ahead, consumer confidence might have further room to improve in the coming months.
The Peruvian GDP grew 4.8% YoY in real terms in 4Q18 (vs. 2.8% YoY in the previous quarter), bringing the full-year GDP growth rate to 4% in 2018. The bounce in annual growth was broad-based, driven by the strengthening of household demand, public expenditures, investments and net exports.
Looking ahead, GDP growth could be between 3.5-4% in 2019, as domestic drivers are likely to sustain their momentum.
Looking forward: A wide variety of relevant macroeconomic data will be released this week, as Mexico, Brazil and Colombia will release their respective 4Q18 GDP statistics. Furthermore, various monthly macroeconomic indicators are scheduled for this week as well, such as the current account balance in Brazil, industrial production in Chile, trade balance in Mexico, and the jobs report in Colombia.
Africa 26 Feb 2019AFRICA
MSCI Africa 807 +3.35%
The South African stock market led the Africa indices this week with a 4.1% return (in USD) on the back of a positive reception to the 2019 budget. Egypt followed with 1.1% USD return while Kenya, Nigeria and Morocco were down 2.3%, 1.1% and 0.8% respectively (all in USD).
Africas largest democracy Nigeria conducted its presidential election at second time of asking this weekend. The election is forecast to be its tightest since the end of military rule in 1999, between the two leading candidates, incumbent President Muhammadu Buhari and the former two-time Vice President, Atiku Abubakar. The electoral body started announcing the results on Monday from 11a.m.
The South Africa 2019 budget showed a significant fiscal deterioration from October 2018s midterm budget statement. GDP growth forecast for 2019 was revised down to 1.5% (from 1.7%), and the budget deficit was projected at ZAR 243bn, or 4.5% of GDP, revised upwards by 0.3ppt. The slippage is due to the yearly transfer over the next three years to assist with the reconfiguration of the distressed state power utility, Eskom.
A deterioration of the headline deficit number would normally be credit negative, however, Moody’s said on Thursday that it did not believe that South Africa’s decision in its 2019 budget to raise the expenditure ceiling would weaken fiscal policy credibility.
The budget bill was always going to be difficult with the challenges at Eskom, the weak economy and an upcoming election. Encouragingly, the Finance Minister not only made strong statements about the need for SOEs to be restructured, but also committed to reducing public sector wage bill and put strong emphasis on the role of the private sector in the economy. Given the rulings party anti-capital roots, the ability to make good on these promises will depend on the mandate it commands in the general election in May. In the meantime, the markets will await Moodys rating review decisions in March.
Headline CPI inflation in South Africa slowed to 4.0% YoY in January, a 10-month lowfalling 0.2% on a monthly basis, primarily owing to a decline in fuel price, which will be countered by the increase in the fuel levy announced in the budget.
Egypt successfully issued USD 4bn USD-denominated bonds. The offering was more than five-times oversubscribed, attracting USD 21.5bn in bids from 250 investors.
The high coverage plus tighter yields ( final rates were 40 bps lower than the initial yield during the book building process)  shows the positive sentiment by the market towards Egypt. 
Moroccos annual consumer price inflation moderated to 0.5% YoY in January from 1.9% in December. Annual food inflation rose to 2.3% in January from 1.3% in December, while non-food inflation slipped to 0.8% YoY in January from 1.8%. On a MoM basis, the consumer price index dropped by 0.3%, vs. 0.7% in December.
Tunisias central bank raised its key interest rate 100bps to 7.75%, the third aggressive hike in the past 12 months, to curb inflation. Tunisia’s annual inflation rate in January stood at 7.1%, from 7.5% in December – peaking at 7.8% YoY last June, the highest since 1990.
Looking forward: Kenya releases inflation data and South Africa releases manufacturing PMI and vehicle sales data.
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