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Thursday 29 September 2016

Daily Market Update: G-20 seeks to soothe fears over a global slowdown

Richard Ramsey

Published 08/09/2015 | 12:26

The financial market turbulence in China, primarily linked to its equity market, has been a key theme in recent weeks. However, last week there were further signs that a global economic slowdown, led by China, is emerging.

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Global trade in H1 expanded at its slowest rate since

2009 with US trade with the rest of the world contracting in the first seven months of the year. It was also confirmed that Canada returned to recession in Q2 2015 while the Australian economy saw its economic growth rate slow from 0.9% q/q in Q1-15 to 0.2% in Q2-15. The August manufacturing PMIs indicated that slower growth can be expected in Q3. 23 out of 30 manufacturing PMIs conducted by Markit Economics posted weaker readings in August relative to July. 11 of the PMIs (including China, Russia, Brazil, France & Canada) posted sub-50 readings denoting contraction. Last Thursday it was revealed that the deteriorating economic outlook has led the ECB to cut its economic growth and inflation forecasts too. However, over the weekend, the finance ministers and central bankers of the G20 economies have insisted that the global economy has nothing to fear from a Chinese slowdown. Clearly the G20 are trying to instil some confidence in the global economic outlook.

The health of the US labour market was in focus on Friday with the latest Nonfarm payrolls report. The pace of jobs growth slowed from a net gain of 245k in July to 173k in August. The latter was weaker than the +217k consensus that analysts had anticipated and was the smallest gain in employment in five months. Meanwhile the manufacturing sector posted its largest job losses since July 2013. Despite the slowdown in the rate of employment growth, the US unemployment rate still managed to fall from 5.3% to 5.1% - the lowest rate since April 2009. The pick-up in the rate of growth in average hourly earnings was an unexpected bonus with the annual rate accelerating from 2.1% in July to 2.2% last month. Overall, Friday’s employment report keeps alive the potential for the Federal Reserve to raise its Fed Funds rate on 17th September. Richmond Fed President Jeffrey Lacker will be one of those voting next week and in light of comments on Friday (speaking just before Friday’s employment report) he looks to be in the rate hike in September camp. According to Lacker, he has seen enough healing in the US labour market to warrant raising interest rates soon even if Friday’s figures disappointed.

The Chinese equity markets were closed on Thursday and Friday due to public holidays. Overnight, however, the Shanghai Composite index has continued its slide lower. The Chinese stock market index closed 2.5% lower this morning in its first session of the week. European equities are faring better with the Euro Stoxx index up over 1% in early trading, recouping some of its hefty losses on Friday. The Euro Stoxx and Wall Street’s S&P 500 closed 2.75% and 1.5% lower on Friday. Markets in the US are closed today for the Labour Day public holiday. On the currency markets, the dollar has adopted a firmer tone against sterling and the euro over the last week. EUR/USD is currently changing hands at $1.116 which compares with $1.124 at last Monday’s open. Sterling has fallen almost two cents over the last week and is currently trading at $1.525. GBP/USD briefly dipped below $1.52 on Friday night. Meanwhile EUR/GBP is up over the week from 72.8p at the start of last week to 73.1p this morning.

The week ahead is relatively quiet in terms of top tier data releases as compared with last week. The Bank of England’s MPC policy announcement on Thursday is expected to be another non-event with no change on its monetary policy settings expected. Financial markets will remain sensitive to incoming news on China.

 

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