Weekly Market Update 2018 10 08
08/10/2018
Global Bond Yields Rise
Following strong economic data from the US last week, bond markets began to price in higher yields on the anticipation that the Federal Reserve will raise rates at a faster pace. The benchmark 10-year US Treasury yield increased from 3.08% at the start of the week to 3.23% by Friday, marking the highest level since 2011. Furthermore, bond market concerns filtered through into equities. The market was identifying those companies that would benefit from higher interest rates such as banks and punishing those that may have been used as bond proxies. This was combined with a selloff in the important tech sector on Thursday and Friday leaving global equities lower over the week.
USMCA Trade Agreement
After a drawn-out negotiation, Canada, Mexico and the US have agreed in principle to a revised North American Free Trade Agreement (NAFTA), to be renamed the United States-Mexico-Canada Agreement or USMCA. The agreement between the countries covers over $1.2bn of trade and marks a critical success of the Trump administration’s stance on trade policy. A fundamental change to the agreement impacts the car manufacturing sector, where new constraints have been added to discourage firms from outsourcing manufacturing to lower-cost Mexico. More important for Canada-US trade was the opening up of the dairy industry where the US has required Canada to allow greater competition in their domestic market. However, commentators have not extrapolated the success of these negotiations to other US trade disagreements, notably with China.
US Labour Market & Trade
Data released last week showed the strength of the US labour market continued into September. The biggest news was a fall in the unemployment rate to 3.7% from 3.9%, reaching the lowest level since 1969. Furthermore, wage growth continued, with a 2.8% increase over the year and a 3% rise expected in October after the one-off effects of Hurricane Florence pass through. On trade, a wider deficit was driven by both a fall in exports and acceleration in imports. Lower soybean exports following the pre-tariff surge seen earlier in the summer were partially to blame and they may well not be a persistent driver going forward. However, the buoyant domestic economy has driven the demand for imports. Overall, the data confirms that net trade will be a substantial drag on GDP growth in the third quarter, impacting what would otherwise be another positive figure.
Market Data
Index Open Close Change % Change
FTSE 100 7510 7318 -192 -2.56%
S&P 500 2913 2885 -28 -0.96%
Dax 12246 12111 -135 -1.10%
Cac 40 5493 5359 -134 -2.44%
Nikkei 225 24120 23783 -337 -1.40%
UK 10 Year Gilt Yield 1.58 1.72 0.14 8.86%
