Global investment market update for October 2018
In our latest monthly investment update for October 2018, we look at how the investment markets, global economy and commodity prices are performing.
The FTSE 100 index of leading UK company shares finished September largely flat for the month at 7,510.20, up slightly from 7,432.42 points at the end of August, an increase of 77.78 points or 1.05% during the month.
The Office for National Statistics (ONS) released second quarter data showing that the UK economy grew by 0.4% in the three months from April to June.
Economic growth in the second quarter was supported by the UK’s powerhouse services sector, which grew 0.6% compared to subdued growth of just 0.3% in the first three months of the year.
However, the ONS also revised the growth for the first quarter down from 0.2% to 0.1% leaving the six month growth during the first half of 2018 at its lowest level since 2011.
The downward revision to first quarter growth was a result of updated construction estimates, which the ONS said was due to more comprehensive administrative data replacing surveys covering the industry.
The Bank of England’s Monetary Policy Committee (MPC) voted unanimously to leave the official interest rate unchanged at 0.75% in September. The decision to increase interest rates in August by 0.25% took rates to the highest level since March 2009.
While the holding of the interest rate was widely expected the MPC did flag concern over the Brexit negotiations with the meeting minutes stating, “Since the committee’s previous meeting, there had been indications, most prominently in financial markets, of greater uncertainty about future developments in the withdrawal process.”
Data from the latest IHS Markit/CIPS UK manufacturing Purchasing Managers’ Index (PMI) shows the rate of expansion rebounded in September, with the index rising slightly from 53 in August to 53.8. The increase comes as a result of an improvement in the rate of expansion in both output and new orders, reflecting improved inflows from the domestic and export markets.
The index has been above its neutral position of 50 for 26 months and the increase in September takes UK manufacturing to its highest level in four months.
Rob Dobson, Director at IHS Markit, cautioned on the improved data saying, “September saw a mild improvement in the performance of the UK manufacturing sector…Despite these causes for short-term optimism, conditions in manufacturing are still relatively lacklustre overall. Based on its historical relationship with official ONS data, the latest survey is consistent with output expanding at only a moderate pace.”
Leaders of the European Union rejected the British government’s proposals on how to maintain economic relations with the EU bloc post-Brexit, continuing the air of uncertainty that looms over the negotiations.
The Italian government revealed plans in September to increase its spending levels which triggered sharp falls in European stock markets. Concern has been building regarding levels of debt in the Italian economy which, at 130% of Gross Domestic Product (GDP), is the largest in the Eurozone behind Greece.
Italian stocks fell by more than 3% on the FTSE MIB index in Milan, with the banking index falling 6%.
There are fears that problems in the Italian banking sector could spread to other EU countries, including France, Spain and Portugal, with the potential to reignite a financial crisis across the Eurozone.
Meanwhile in the US, the Federal Reserve increased the target for the bank’s benchmark rate by 0.25%, to a range of 2%-2.25%.
The increase was part of the continued Federal Reserve policy of gradual rate rises with September’s rise being the eighth since 2015 and the third to date in 2018.
Federal Reserve Chair, Jerome Powell, said the rate rise reflected the Fed’s confidence in the US economy, describing it as a “particularly bright moment”. Although he acknowledged that the bank is hearing a “rising chorus of concerns” from businesses about the risk from new US trade tariffs, which have disrupted supply chains and led to retaliation against US exports.
Turning now to China, the world’s second largest economy has accused the US of trade bullying after a new round of US tariffs on Chinese goods were implemented during September.
The latest tariffs on $200bn worth of Chinese products were the largest yet in the escalating trade war between the two economic superpowers.
China retaliated by imposing tariffs on $60bn worth of US goods. In an official white paper, China said the US was employing “trade bullying practices”, “intimidating other countries through economic measures”, and hurting the global economy. China has also accused the US of starting the “largest trade war in economic history”.
Looking at the global economy, the United Nations Conference on Trade and Development (UNCTAD) published their flagship report in September, covering the state of the world economy. The annual report analyses current economic trends and major international policy issues and makes suggestions for addressing them.
The report says that while the global economy has picked up since early 2017, growth remains spasmodic with many countries operating below potential. Meanwhile, trade tensions signal a deeper malaise in the way the global economy works.
Returning to the UK, there was again conflicting house price data released from two of the UK’s largest mortgage lenders during September. Halifax reported that annual house prices rose at a rate of 3.7% in August, despite a month-on-month increase of only 0.1%.
Meanwhile, Nationwide reported a decrease in house prices during August of 0.5% taking the annualised growth rate to 2%. The decline is likely to have been driven by falling prices in London, which is in the grip of a slowdown.
Both lending indices have to deal with a relatively low number of transactions and a two-track UK property market in which activity and prices have stalled in the south but are robust in the north.
£1 currently buys $1.3043 or €1.1232. The Forex Gold Index is $1,186.63/oz and the Silver Index is $14.57/oz. Brent Crude Oil Spot is currently $80.89/barrel.