US/China trade talks dominate as 15th December deadline for further tariffs looms
Positive news out of China pointing to a pick up within the industrial sector was swiftly counteracted by weak data out of the US, suggesting further contraction within manufacturing. Markets were further roiled by President Trump’s latest move to reimpose tariffs of 25% on steel and aluminium imports from Brazil and Argentina. On Tuesday Trump suggested that any trade deal with China could be delayed until after the November 2020 US election, sending equities down further and haven assets rallying. Towards the end of the week markets started to believe Trump’s comments may be bluster with equities recovering, reinforced by a Bloomberg report that the US and China were moving towards agreeing the level of tariffs that would be removed in any initial deal. As of 2pm on Friday, the latest US non-farm payroll figures were released, with the number of new jobs coming in at 266,000, trouncing estimates of 183,000, with average hourly earnings rising to 3.1% annually, sending markets back up, as fears of a global recession slipped further away.
Equities recover much of their losses as hopes for trade talks improve
As of 2pm on Friday London time, US equities are down 0.8% for the week, European equities off 0.5%, and UK equities down 1.5%, suffering from Sterling climbing to $1.313 and €1.185 as opinion polls continue to suggest that Boris Johnson’s Conservative party can win a majority at next week’s general election. Japanese equities rose 0.8% on the back of Prime Minister Shinzo Abe launching a larger than anticipated fiscal stimulus splurge. Emerging markets rose 0.3%, but within that Chinese domestic stocks leapt 1.4% on a combination of positive industrial data and continued hopes of a deal being signed with the US.
Whilst haven assets give up their gains for the week
Government bonds, having rallied earlier in the week, subsequently gave back their gains with the yield on 10-year US Treasuries having risen to 1.85% (yields move inversely to price), UK Gilts 0.78% and German Bunds minus 0.29%. At the time of writing, gold finished the week flat at $1,1471 an ounce, having rallied strongly earlier in the week.
Chinese industrial survey points to recovery
Last weekend China released the latest purchasing managers index data, with the index for the industrial sector rising to 50.2, up from 49.3 in October, with 50 being the dividing line between expansion and contraction. This was mirrored by the private Caixin-Markit PMI, which is a leading indicator for the health of smaller industrial companies, also rising to 51.8 in November, this being the highest figure recorded in three years.
Whilst US industrial survey points to more pain
However, it was a different story in the US, with the ISM (Institute of Supply Management) Manufacturing index weakening to 48.1 for November, versus forecasts of a rise. However, this is contrary to the Markit PMI which has shown an improving picture since August, with November’s reading coming in at 52.6. The main difference between the two surveys is that ISM equally weight the factors it is measuring, whilst Markit puts greater emphasis on the factors that are considered more forward looking.
And further industrial contraction in Europe
The Eurozone manufacturing PMI came in at 46.9, the tenth consecutive month of contraction, but nonetheless, an improvement on the prior month. On Friday it was revealed that industrial output for Germany fell 5.3% in October for the year, a figure likely to weigh on Eurozone growth for the final quarter.
Australian equities hit by suggestions Trump is in no hurry to conclude a trade deal
The Australian market managed to end a volatile week on a steadier note, but still finished the week in negative territory, unable to recover fully from its decline earlier in the week. Information technology, consumer staples and energy were the hardest hit, logging declines of 2% or more over the week. The consumer staples sector fell the most with a decline of 3.3% on Tuesday alone, largely due to a 3.4% decline in Woolworths, after the retailer closed at a record high of Australian Dollar $40.04 on Monday.
Elsewhere, the Reserve Bank of Australia left its main interest rates on hold at 0.75%, stating it wants to give its previous interest rate cuts a chance to work through the economy before looking to make any further changes in monetary policy next year.