Weekly market review and outlook: Weak figures cause a fall in markets

The US, in particular, has a number of talking points at the moment, with the run-up to the 2020 elections and potential interest rate cuts next week.

Article updated: 7 October 2019 11:00am Author: Joe Healey

Review: 23rd – 27th September

Continuing market uncertainty, alongside weak economic data releases, caused a fall in markets this week. The latest monthly Purchasing Manager’s Indexes (PMI) for September were released, with the UK, US, China and Euro-zone all posting figures. PMI’s are considered to be a useful forward-looking indicator that summarize market conditions based on perspectives of purchasing managers stemming across multiple industries. Chinese results surprised on the upside with both services and manufacturing PMI’s rising. US figures were not as promising, rising marginally but teetering just above the threshold for contraction, whilst Eurozone data remained contractionary.

As expected, the data was bleak for the UK where the Brexit cloud continues to loom. The UK PMI indicated another contractionary month, with output, new orders and employment falling further. Some stock building ahead of this month’s Brexit deadline was also noted helping to reduce the extent of contraction. These results highlight the necessity for businesses to ensure a margin of capital flexibility in order to combat these volatile times.

The most notable decline was from the UK services sector, which has been the cornerstone of economic resilience in recent months. A fall to 49.5, from the previous months 50.6, represents a six-month low and means all three UK PMI indicators are now in contractionary territory reigniting fears of a UK recession.

Across the Atlantic, the run-up to the 2020 election continues to build. Top candidates Joe Biden and Elizabeth Warren seem ready to battle Trump to the presidential spot and have been featured heavily in the media outlets over the week. Warren’s radical policies including cancelling student debt, banning fracking and even breaking up the big tech companies such as Facebook and Amazon have caused a stir with Mark Zuckerberg threatening to take her to court in a leaked audio tape. Trump, however seems to be more concerned with Joe Biden based on requests to China and Ukraine to investigate him in an attempt to smear the campaign of his biggest perceived threat.

The week ahead – 7th – 11th October

Moving into next week, analysts will be interested in the Federal Open Market Committee (FOMC) minutes scheduled on Wednesday evening as the latest outlook and thoughts on the US monetary system will be released. These minutes can cause bouts of volatility in currency markets as investors quickly react to any clues on policy changes. A global growth slowdown, uncertainty over trade and recent weaker economic data make it highly likely that the US Fed will cut rates, with the probability, according to CME’s Group Fed Watch Tool, surging to 90%. With this in mind, the consensus of traders currently expects, in total, at least four rate reductions in 2019.

On Thursday, US Consumer Price Index (CPI) inflation figures are set to be released, with the consensus estimate at 1.8% compared to 1.7% in the previous month, bringing them closer to their 2% target. With global uncertainty rising, it is important for the Fed to boost current inflation, because with low inflation usually comes low interest rates; this restricts the monetary toolbox should the slowdown in growth accelerate and a recession hits. If we take a look back in time, the US typically lowers interest rates by 5% points during recessions in order to stimulate growth. However, with the current Fed Funds rate standing at 2%, this monetary margin is considerably reduced.

Bringing the attention back to the UK, Thursday marks the release of August’s Industrial and Manufacturing production figures, where consensus estimates year-on-year currently stand at 0.4% and 0.5% respectively compared to falls of 0.9% and 0.6% in the previous month.

All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read our Investment Research Policy.

Joe Healey

Investment Research Analyst

Following his completion of the graduate scheme, Joe is an Investment Research Analyst covering equities. He holds a BA Hons Business Management degree and is currently studying towards CFA Level II after passing CFA Level I in June 2019.

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