News that the U.S. and China agreed to hold trade talks in October was welcomed by investors this week. This is later then the originally scheduled September date but a relief to many, given recent signs that talks might be cancelled altogether. Sentiment was further bolstered on news that Hong Kong’s leadership had formally withdrawn its extradition proposal as well as easing fears of a no-deal Brexit.
Hong Kong’s leadership formally withdrew its extradition proposal on Wednesday which led to months of protests in the province. Opponents to the bill saw it as a mechanism to undermine Hong Kong's legal freedoms as it would have allowed criminal suspects to be extradited to mainland China from Hong Kong. Protests however continued this weekend as the movement has since morphed into a broader anti-government movement calling for fuller democracy in Hong Kong.
The risk of a no-deal Brexit eased this week as U.K. Prime Minister Boris Johnson lost a series of parliamentary votes, thwarting both his efforts to take Britain out of the EU without a deal at the end of October and his call for a snap election. Opposition leaders have agreed to work together to block Johnson’s renewed call for an October 15 general election until a bill forcing him to seek a three-month Brexit delay is approved by Parliament and signed into law. Nevertheless, the odds of an election before year-end remains possible.
U.S. economic data released during the week was mixed as manufacturing activity contracted, falling to a three-year low, while non-manufacturing activity (which accounts for the bulk of economic activity) expanded and accelerated versus the pace of activity in July. The latest employment report showed that the U.S. economy added 130,000 jobs in August compared to expectations for a gain of 160,000 jobs, whilst the unemployment rate remained steady at 3.7%.
China’s cabinet signalled that it would roll out fresh stimulus measures to bolster its economy. Chinese authorities released a statement on Wednesday calling for the “timely” use of tools including broad and targeted cuts to banks’ required reserve ratios and “faster” implementation of measures to reduce real borrowing costs. This was confirmed on Friday, after the People’s Bank of China (PBOC) said it would cut the required reserve ratio for all banks by half a percentage point, effective September 16.
All eyes on Hurricane Dorian as it hit the Bahamas and made landfall over Cape Hatteras, North Carolina, on Friday morning. The hurricane decimated parts of the Bahamas with winds so powerful, they were last recorded at these speeds (220km’h) in 1935.
For the week, global equities were stronger. In the U.S., the Dow Jones (+1.49%), S&P 500 (+1.79%) and Nasdaq (+1.76%) were all positive, whilst the Euro Stoxx 50 (+2.00%), FTSE 100 (+1.04%), Nikkei 225 (+2.39%) and Shanghai Composite (+3.93%) Indices were also stronger.
Market Moves of the Week
South Africa’s economy grew by 3.1% (annualised) for the three months ending June, compared with a revised 3.1% contraction in the first quarter. The median estimate of 17 economists in a Bloomberg survey was for South Africa to grow by 2.5% for the 2nd quarter.
In other emerging market news, Argentina’s central bank implemented currency controls over the previous weekend. Under the new restrictions, individuals may not buy more than USD $10,000 per month; exporters must convert their U.S. dollar proceeds into Argentine pesos within five days after completing a sale; and corporations need central bank permission to access foreign currencies for investments, for paying dividends, or for pre-settling debts.
The JSE All Share Index ended the week up 0.60%, with industrials (+1.70%) and financials (+3.16%) stronger, whilst the resource sector (-3.05%) was weaker.
Chart of the Week
The chart above looks at the close correlation between monetary policy and global manufacturing PMI. We have witnessed a slowdown in global manufacturing activity as evidenced by the decline in many countries’ manufacturing PMI readings over the last 18 months (impacted by rising trade tensions). Whilst U.S.-China trade negotiations remain unclear, monetary policy is at least playing to some familiar rules. The recent global monetary policy cutting cycle is setting a path to a cyclical upturn in the global economy in 2020.
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