Monday 19 August 2019

Daily Market Update: Geo-Political Tensions Increase


Ian Fraser

Starting on a positive note, as we mentioned briefly yesterday, we saw the release of Novembers IFO, the German Business climate index which posted at 109.00.

Looking more closely at the release, up from Octobers reading of 108.20, it further supports the improved picture from Monday's Composite PMI’s. The IFO is compiled from a survey of 7,000 firms and the accompanying press release from the Munich based institute commented that ‘The German economy remains unaffected by the growing uncertainty world wide. Not even the Paris attacks had a negative impact on survey data’. The survey also noted that the manufacturing index rose after a 3 month decline with optimism about the short term now at its highest since March. How long this upsurge in confidence can continue will surely in part be determined by the swift resumption of business as usual within Brussels, which is starting this morning, and over the coming weeks the impact that the recent events have had on underlying business and overall economic activity of goods and people around Europe.

Clearly, the on-going geo-political tensions have ratcheted higher following the downing of a Russian Fighter jet by NATO member Turkey. While the medium term implications for this are as yet unknown, the immediate reaction within the financial markets was for the USD to fall from a 8mth high against other currencies, oil to increase by 3% and Gold to show a slight rise of 0.4%.

Yesterday’s main focus for the Financial Markets was the attendance of 4 members of the Bank of England's MPC who were giving testimony to the Treasury Select Committee, post the release of the November Quarterly Inflation Report. The overall takeaway is that of a more dovish position since the publication was released. This was underlined by the BoE’s Chief Economist Andy Haldane commenting that ‘I can see the balance of risks around UK GDP growth and inflation as skewed materially to the downside, more so than embodied in the November 2015 Inflation Report’. And he went on to say there are of course risks to the upside, but are considered more modest. Clearly the economic headwinds continue to prevail for the UK and post the testimony the Financial Markets are looking for the first rise from the Bank of England in Qtr3 2016. While the topic of Brexit is not currently having a significant direct impact upon the Markets, it will have greater prominence in the UK story early 2016 and a poll released yesterday, conducted on behalf of The Independent newspaper, has for the first time recorded a majority, 52%, of those polled seeking to exit the EU, a swing of 7% since June.

In the US we saw the revision of Qtr3 GDP which came in at 2.1%, on a annualised basis, versus the initial reading of 1.5%. Consumer spending which accounts for 2/3rds of economic activity increased 3.00%. There has been sizable inventory accumulation during Qtr3 now at $90.2Bn versus $52.6bn posted last month and this is likely to have a drag on Qtr 4 growth. Although the headline figure is well down on that posted in Qtr 2 at 3.90%, it further supports the expectations that the Fed will raise rates at their December meeting. House prices continue to grow at double the rate of inflation with the S&P Case – Shiller report showing uplift to 4.9% for September from 4.6% for August. These positive releases enabled US equities to claw back the losses posted earlier in the sessions with the Dow Jones closing at 17812 +0.11% and Nasdaq at 5102.81, up +0.01%

The focus for today in the UK will be the release of the Governments Spending review and Autumn Statement. The Spending Review is the first since October 2010 and will outline how the UK government will progress with their austerity program over the coming 5 years and clearly the challenge will be for the economy to remain on an upward trajectory while public sector expenditure contracts. While we do not look for significant revisions to the forecasts, it is likely that an increase in borrowing will be required, especially if the UK Government provides a stimulus to the housing sector.

Looking at the day ahead, in the US we have a number of key economic releases with the PCE October report published along with Durable Goods orders. Thanksgiving Da means the early release of Initial Jobless claims, and the University of Michigan confidence index. And finally closer to home, we have the release of Ireland’s November property prices which for October posted monthly gains of 1.30% and 8.9% on a yearly basis.

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