Week in Review: ECB Cuts Rates, Revives QE

Improving economic data, supportive global central-bank policies and optimism around trade, all led stocks to advance near record highs. The ECB announced a package of easing measures on Thursday including cutting its deposit rate by 10bps to -0.50% (as expected). The ECB also announced the restart of net asset purchases (QE) from the 1 November. These will be conducted at €20bn a month, a smaller amount than had been expected, however, the QE programme is open-ended rather than the one-year programme which was largely expected.

China announced that it would exempt some U.S. products from tariffs, and the U.S. responded with delaying the increase in some of its tariffs scheduled to take effect next month. These goodwill gestures from both sides sparked optimism that an interim trade agreement can be achieved ahead of the resumption of face-to-face talks in Washington in October.

The pound rose to its highest level against the U.S. dollar since July as Parliament passed a law that forces the UK government to seek from the European Union a Brexit extension and avoid a no-deal Brexit deal on October 31. Prime Minister Boris Johnson is scheduled to meet European Commission President Jean-Claude Juncker on October 16 to discuss potential changes to a Brexit deal. The pound also gained some strength after data showed that the UK economy grew faster than expected in July.

China's exports unexpectedly contracted in August, with sales to the U.S. tumbling 16%. Tourist arrivals in Hong Kong declined almost 40% in August from a year earlier, Financial Secretary Paul Chan wrote in a blog post last Sunday.

For the week, global equities were stronger. In the U.S., the Dow Jones (+1.58%), S&P 500 (+0.96%) and Nasdaq (+0.91%) were all positive, whilst the Euro Stoxx 50 (+1.57%), FTSE 100 (+1.17%), Nikkei 225 (+3.72%) and Shanghai Composite (+1.05%) Indices were also stronger.


Market Moves of the Week

Local headlines focused on the much-anticipated unbundling of Naspers and the listing of Prosus on the Euronext Amsterdam and Johannesburg Stock Exchanges on Wednesday, as management tries to create more value for investors. While Naspers fell an expected 30%, reflecting the unbundling, Prosus increased on debut. Combined, the two groups were up about 4% from the Naspers closing price on Tuesday.

Moody’s Ratings Agency also provided a more upbeat assessment of SA’s investment grade credit rating than expected. The rating agency stated that fixing Eskom Holdings SOC Ltd. is complex and it will take time for the government and the company to agree to a plan. Moody’s will be able to better judge South Africa’s fiscal and economic outlook once the long-term plan for Eskom is known.

SA business confidence fell to a 20-year low in the third quarter. The RMB business confidence index compiled by the Bureau for Economic Research was at 21 points. The survey showed that the last time the index was at a similar level was during the 1998-1999 emerging market debt crisis.

Steinhoff International Holdings NV was given a record 53 million-rand ($3.6 million) fine by South Africa’s financial regulator for failing to properly disclose accounting problems to shareholders. The Financial Sector Conduct Authority reduced the figure from an initial 1.5 billion rand in light of the retailer’s precarious financial position.

The JSE All Share Index ended the week up 2.76%, with industrials (+2.59%), financials (+4.24%) and resources (+2.63%) all stronger.

Market moves with 15 Sept 2019

Chart of the Week

An overlooked aspect of 2018 was how significant monetary policy was during the year.  As reflected in the chart above, there was a 9-month period in 2018 where we exclusively saw rate hikes globally.  At the same time the ECB and BOJ were tapering quantitative easing (QE), and the Fed was doing quantitative tightening. Coming out of a world that had gotten used to ultra-low interest rates and super easy money, this tightening of policy (and if you recall, a surge in bond yields) really took a bite out of the global economic cycle.  And now central banks are furiously backpedalling.

Chart of the week - 15 Sept 2019

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