Wednesday 20 November 2019

Daily Market Update: Equities rally on speculation interest rates will remain lower for longer


Richard Ramsey

Financial markets’ risk appetite increased yesterday with strong gains on global equity markets.

The general theme with the incoming economic news is the data is weaker than anticipated. This is fuelling the view that central banks will keep interest rates lower for longer. Financial markets remain most sensitive to the Fed’s interest rate hiking intentions but remain alert to the prospect of more monetary stimulus from the Bank of Japan and the ECB. Friday’s disappointing nonfarm payrolls figures were followed yesterday by signs of slower rates of service sector growth on both sides of the Atlantic. The closely watched ISM Non-manufacturing survey fell from 59.0 in August to 56.9 in September. This was below the 57.5 pencilled in by analysts. Remember with the PMI surveys 50 is the threshold between expansion (>50) and contraction (<50). Only a month ago futures markets were assigning a 57.5% probability of the Fed hiking at its December meeting. Now, the futures markets are assigning only a 35% probability of a December rate rise. However, the head of the Boston Fed, Eric Rosengren, quoted in a Reuters interview since Friday’s payrolls report, stated that he still expected the Fed to raise rates in 2015. Wall Street’s S&P 500 closed 1.8% higher yesterday which compared with a 3.3% gain for the Euro Stoxx index.

The other big piece of news overnight is the Trans-Pacific Partnership deal agreed between the US, Japan and ten other Pacific Rim economies. It represents the biggest trade agreement in history, reducing tariffs and nontariff barriers to trade across all twelve economies. The deal, which has been negotiated for over two years, will still have to be voted on by the governments of all twelve economies. It is viewed as unlikely that the deal will be finished before President Obama leaves office in 15 months’ time.

Yesterday’s UK services PMI didn’t produce the pick-up in activity that economists had anticipated. Instead services sector activity eased for a third month in a row from 55.6 in August to 53.3 for September. The latter represented the weakest rate of growth in the UK economy’s largest sector since April 2013. The new orders index also fell to a 29-month low with the forward looking future activity index falling to its lowest level in over a year. Despite these negative headlines, UK services firms saw a notable pick-up in employment growth in September. Meanwhile the composite index recorded the same reading (53.3) which compared with 55.2 in August and it also represented the weakest rate of expansion since April 2013. This was despite stronger than expected readings in both the manufacturing and construction sectors last week.

The weaker than expected trend in activity amongst services firms wasn’t confined to the UK with the PMIs for Spain, Italy and Germany disappointing expectations. Spain’s services PMI saw its rate of growth slow markedly from a very strong 59.6 in August to 55.1 in September. The latter represented Spain’s weakest rate of growth for the year. Meanwhile the equivalent survey for Italy saw the pace of activity ease from its recent high of 54.6 in August to 53.3 last month. In Germany, the final services PMI eased slightly from the flash September estimate of 54.3 to 54.1. This compared with 54.9 in August. France was the only one of the top four Eurozone economies to see a pick-up in service sector growth in September. French service sector activity accelerated from 50.6 in August to 51.9 in September. In light of the above, the overall Eurozone services PMI slipped from its recent high of 54.4 in August to 53.7. Meanwhile the Eurozone composite PMI, which incorporates both the manufacturing and service sectors, undershot its earlier flash estimate of 53.9 for September to 53.6. This compares with the series high of 54.3 in August.

Outside of the PMIs, the other release of interest in the Eurozone was the latest Sentix investor confidence survey. Investor sentiment fell in October for the fourth successive month and to its weakest level in 9 months. The decline in confidence began when concerns over the Chinese economic slowdown intensified. Further declines in German factory orders this morning will feed into that narrative. Factory orders fell unexpectedly by 1.8% m/m in August with the decline in July (-2.2%) larger than previously estimated. It is worth bearing in mind that the impact from the VW scandal has still to filter through into the orders figures. Looking to the day ahead we have the Eurozone retail PMI. Financial markets will also pay close attention to ECB President Mario Draghi who is due to deliver a speech in Frankfurt. Two Federal Reserve officials (Esther George & John Williams) are also set to deliver speeches this afternoon / evening. San Francisco Fed President, John Williams’ speech will include a media Q&A after the event.

Finally on the currency markets, EUR/GBP is still struggling to maintain a sustained break above 74p. The currency pair remains stuck at this level as I write. EUR/USD is a tad lower at $1.121 this morning, down from $1.124 at yesterday’s open. Meanwhile cable is down 0.4% over the last 24 hours or so and is back below $1.52 at $1.516 this morning.

Sponsored by: Ulster Bank

Online Editors

Also in Business