Monday 19 February 2018

Daily Market Update: Risk appetite returns despite stagnation within global manufacturing

ChinaFotoPress/ChinaFotoPress via Getty Images)
ChinaFotoPress/ChinaFotoPress via Getty Images)

Richard Ramsey

Investors have started the month of March in buoyant mood with risk appetite returning yesterday.

The main global equity market indices posted strong gains with the Euro Stoxx up 1.7% and Wall Street’s S&P 500 up 2.4%. An encouraging set of US economic figures help soothe investors’ concerns. However, the bigger picture, as far as global manufacturing activity is concerned, is one of stagnation. According to the JPMorgan’s Global Manufacturing PMI, produced by Markit, manufacturing growth slowed from 50.9 in January to no change (50.0) for February. This represented the weakest reading since November 2012. The wider global manufacturing slowdown is feeding through into the UK. The pace of manufacturing growth eased from 52.9 in January to a disappointing 50.8 for February. This was the weakest reading since April 2013.

Concerns over China continue to rumble on in the background. This morning Moody's downgraded its outlook on Chinese government debt to "negative" from "stable", citing uncertainty over authorities' capacity to implement economic reforms, rising government debt and falling reserves. It is likely that the slowdown in China will eventually trigger a currency devaluation. With the Chinese authorities burning through its foreign exchange reserves this could happen within the next 6 months. Moody’s has warned that it may downgrade China’s sovereign rating from Aa3, its fourth highest rating.

Yesterday’s incoming US economic data was largely better than expected. The ISM manufacturing PMI posted its fifth successive reading below the 50 expansion threshold. However, the 49.5 print was the best reading in the five-month series and better than analysts had expected. This suggests the recent decline in manufacturing activity is stabilising. Meanwhile there was even better news for the US construction industry. Construction spending hit an 8-year high in January. Despite this improving economic data, an influential Fed policymaker, speaking yesterday, sees downside risks to the US economic outlook. The New York Federal Reserve President, William Dudley suggested that the recent turmoil in the markets may force the Fed to tighten monetary policy even more slowly.

Looking to the day ahead, following on from the UK’s disappointing manufacturing PMI yesterday we have the equivalent survey for the construction industry today. Analysts expect the healthy rate of expansion in January (55.0) to have continued last month (55.5). In the Eurozone there are no releases of note, although ECB Executive Board Member Benoit Coeure will be speaking at an event in Frankfurt. In the US, the Fed’s Beige Book of economic conditions and the ADP private sector employment report are the two key releases of the day. The ADP report is expected to reveal a net gain of 190k jobs in February, down from the 205k figure in January.

On the currency markets EUR/USD is currently trading at $1.086, down slightly from yesterday’s open. EUR/GBP has been trading within a relatively narrow range over the last 24 hours and is currently changing hands at 77.9p. Meanwhile GBP/USD remains below $1.40 at $1.393.

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