Data released during the week raised concerns that manufacturing activity is contracting across advanced economies. Markets also reacted to a new round of tariffs announced this week. The White House announced tariffs on $7.5 billion of European goods that will take effect on October 18.
In the U.S., a key indicator measuring manufacturing activity recorded its lowest level in more than a decade, while other surveys showed factory activity is also contracting in Japan and Eurozone. It is important to note that manufacturing accounts for less than 10% of output and 9% of jobs created in the United States. Data on the much larger services sector, which comprises of 80% of the U.S. economy, shows that it is still expanding, though at a slower pace. The U.S. September jobs report released on Friday also provided some assurance that despite a slowdown in hiring, the labour market remains tight, a positive for consumers and the economy. The U.S. unemployment rate fell to 3.5%, its lowest level in five decades.
UK Prime Minister, Boris Johnson, made a final Brexit offer to the EU with a proposal for a regulatory zone in Ireland, to cover all goods, replacing the Irish backstop arrangement. Johnson added that unless the EU compromised, Britain would leave without a deal at the end of the month. Talks will resume on Monday after the EU said the UK's proposed alternative to the Irish backstop could not be the "basis" for a legally binding treaty. The UK has said it would work on the details before then but there was "no path" to a deal without alternative arrangements in Northern Ireland.
In Europe, ECB President, Mario Draghi stated that wide fiscal stimulus aimed at boosting investment is a step in the right direction, but insufficient and called for further stimulus if needed. Bank of Japan Board member, Yukitoshi Funo, issued a similar statement, reiterating the central bank’s readiness to respond to the broadening hazards. Accommodative central bank policies remain a key source of support for financial markets.
Most stock market indices suffered losses this week while bonds rose, helping smooth out volatility for balanced portfolios. In the U.S., the Dow Jones (-0.92%) and S&P 500 (-0.33%) Indices were negative, whilst the Nasdaq (+0.54%) managed to end the week in positive territory. Similarly, the Euro Stoxx 50 (-2.80%), FTSE 100 (-3.65%), Nikkei 225 (-2.14%) and Shanghai Composite (-0.92%) Indices were also weaker.
Market Moves of the Week
In local news, Fitch Ratings downgraded Eskom debt. It sighted “weakening revenue growth” as one of several reasons behind the downgrade and deemed South African government financial support for the heavily indebted utility to be “inconsistent.” Later in the week, the African National Congress briefed the media regarding its plan to boost the local economy. It also said it will decide on a plan for troubled state-owned entity Eskom by the end of the month.
The JSE All Share Index ended the week down 2.20%, with industrials (-2.84%), financials (-1.42%) and resources (-2.38%) all weaker.
Chart of the Week
Historically, the Fed finds it difficult not to give the market what it wants. Moves in the performance of stocks compared to bonds (proxied in the chart by the ratio of stock-to-bond ETFs) have been leading the Fed throughout its attempt to normalise monetary policy after a prolonged period of near-zero rates. Janet Yellen, as chair, started to raise rates in 2015, hiked once, and then waited another year, until stocks started to outperform again with the election of President Trump, before raising again. All the rises since followed clear outperformance by stocks – until the final, contentious tightening under Powell last December. The pattern seems clear, with the Fed prepared to tighten only when stocks are outperforming and feeling obliged to cut when they do worse.
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