In focus - Economics
Monthly markets review - February 2019
A look back on markets in February when easing trade tensions helped support equity market gains.
6 March 2019
- Global equities made further progress in February as investors grew optimistic that a resolution to the US-China trade standoff is drawing nearer. Government bond yields broadly rose (i.e. prices fell).
- US equities rose. The news that the US has suspended the imposition of increased tariffs on $200 billion of Chinese goods was supportive.
- Eurozone equities also gained. A source of support was the suggestion that the European Central Bank could restart its targeted long-term refinancing operations, which offer cheap loans for banks.
- UK equities rose but lagged global equities as a result of sterling strength, which was due to rising hopes that the UK would avoid a disorderly exit from the European Union.
- Japanese equities gained as fears receded over the extent of the global slowdown. After moving sharply stronger at the end of 2018, the yen has gradually weakened again.
- Emerging markets (EM) equities recorded a marginal gain in February, boosted by the easing US-China trade tensions.
- Government bond yields rose in February with sentiment and conditions continuing to favour riskier assets. Corporate bonds outperformed government bonds.
Please note any past performance mentioned in this document is not a guide to future performance and may not be repeated. The sectors, securities, regions and countries shown are for illustrative purposes only and are not to be considered a recommendation to buy or sell.
US equities gained in February. There was little change in the backdrop from an earnings and economics perspective. Q4 GDP growth, released later in February than usual, indicated quarter-on-quarter growth of 2.6%. This was stronger than expectations of 2.2%, but slower than the 3.4% growth in Q3 and is expected to slow again in Q1. Employment data remained robust. Similarly, US earnings remain stable – 70% of company earnings were better than expected – but earnings expectations for future quarters continue to fall.
However, Congress and the White House reached an agreement early in February to end the government shutdown. Investors were then further cheered by hopes that trade posturing between the US and China could soon draw to a close. The US has suspended the imposition of increased tariffs on $200 billion of Chinese goods that was planned to take effect on 1 March. US equities rallied on hopes that a deal will be made.
All areas of the S&P 500 advanced, although differences between sectors was significant. Companies in the IT and industrial sectors were amongst the strongest over the month, while consumer discretionary and communication services only just edged into positive territory.
Eurozone equities gained in February with the MSCI EMU index returning 3.9%. Progress in US-China trade talks helped to lift sentiment towards riskier assets such as equities. Another source of support was the suggestion that the European Central Bank could restart its targeted long-term refinancing operations, which offer cheap loans for banks. Banks were among the top performers while economically-sensitive sectors such as industrials and materials also fared well. Weaker sectors included real estate and utilities.
Data confirmed that the eurozone economy grew by just 0.2% in the final three months of 2018. Germany saw zero growth while there was confirmation that Italy had slipped into recession. However, Spain saw a growth rate of 0.7% and France 0.3%. The flash composite purchasing managers’ index (PMI) for February came in at 51.4, up from 51.0 in January, but the manufacturing component was in contraction with a reading of 49.2. Consumer surveys were more encouraging, with an uptick in the European Commission’s flash consumer confidence survey for February. On the political front, Spain’s prime minster called a snap election scheduled for 28 April after parliament failed to pass the 2019 budget.
The UK stock market performed well over the period, although lagged global equities as sterling recovered amid growing hopes that the country would avoid a disorderly Brexit. Many domestically focused areas also extended their recent recoveries, further helped by some better-than-expected data.
The UK labour market bucked a wider slowdown in the economy during the fourth quarter of 2018 while nominal wage growth remained robust. The Office for National Statistics also revealed that UK inflation had fallen to a two-year low in January and that retail sales had bounced back strongly from a poor December.
However, the UK economy slowed sharply in the final quarter of 2018 as Brexit uncertainty weighed on business investment. Real GDP growth fell from 0.6% in Q3 to 0.2% in Q4, lower than consensus forecasts of 0.3%. For 2018 as a whole GDP grew by 1.4% - its weakest growth rate since 2013.
This added to concerns around the outlook for the first half of 2019 and the Bank of England cut its growth forecasts in its latest Inflation Report. The bank lowered its annual average GDP growth projections from 1.7% to 1.2% for 2019, and from 1.7% to 1.5% in 2020.
The Japanese equity market recovered further ground in February, as fears continued to ease over the extent of the global slowdown. The Japanese market rose steadily in the second half of February to end the month 2.6% higher. After moving sharply stronger at the end of 2018, the yen has gradually weakened again.
The corporate results season ended in mid-February and was generally interpreted negatively, although the balance of earnings surprises was only slightly skewed to the downside. Despite a clear deterioration in fundamentals for some companies, the negative share price reactions were very muted, suggesting that almost all of the setback had already been discounted in stock prices. Overall, however, we see little fundamental deterioration in the domestic outlook, with most of the negative surprises driven by the sharper-than-expected slowdown in the external environment, especially in China. This particularly affected results in the automotive sector while many tech stocks were also impacted by the slowdown in smartphone sales.
Initial estimates of GDP growth for Q4 2018 were seen in February, with a slightly slower-than-expected rebound from the Q3 weakness which had, in turn, resulted from a series of natural disasters in Japan. Other short-term economic data released during the month was generally poor, with statistics on industrial production and housing undershooting expectations. Inflation data, however, remained solid and the outlook for this year remains relatively firm.
Asia (ex Japan)
Asia ex Japan equities extended their gains in February though returns across the region were mixed. Investors cheered signs of progress in US-China trade negotiations; US President Trump delayed the implementation of further tariffs on Chinese goods originally scheduled to take effect on 1 March. Markets in Hong Kong, Taiwan and China generated strong returns. Chinese stocks were further buoyed by news that index provider MSCI would increase the weighting of China-listed shares in its benchmark indices. Meanwhile, China’s economic data continued to point to slowing momentum. The official PMI fell to a three-year low in February, its third straight month of contraction.
Elsewhere, Indian stocks trailed amid escalating geopolitical tensions with Pakistan following a deadly attack on Indian soldiers in the disputed Kashmir territory. Separately, the Reserve Bank of India cut its benchmark interest rate by 25 basis points to 6.25%, citing slowing economic growth and lower inflation. South Korean equities fell as the US-North Korea summit ended abruptly without an agreement on denuclearisation.
Recent outperformers in ASEAN (Association of Southeast Asian Nations) markets closed broadly lower. Indonesia fared worst, weighed down by steep declines in the consumer discretionary and materials sectors. The Philippines and Thailand also retreated. On a more positive note, Indonesia’s economy expanded by 5.18% year-on-year in the fourth quarter thanks to strong consumption, investment and government spending.
After a strong rally last month, emerging markets equities posted a marginal gain in February. The MSCI Emerging Markets Index increased in value but underperformed the MSCI World.
China was among the best performing index markets. In addition to positive developments on the trade front, a sharp increase in credit growth in January suggested that domestic policy support may be impacting activity. Taiwan also outperformed, amid gains for technology stocks.
By contrast, those markets most sensitive to external funding lost value amid a pick-up in the US dollar; this included South Africa, Turkey and Indonesia. Elsewhere, Brazil and Mexico also fell back. In Brazil, this was despite the announcement of an ambitious social security reform proposal. However, Q4 GDP growth of 1.1% year-on-year was weaker than expected.
Government bond yields rose in February, meaning prices fell, with sentiment and conditions continuing to favour riskier assets. Sentiment remained positive on the back of the more dovish rhetoric from Federal Reserve Chair Jerome Powell and there was optimism around trade talks between the US and China.
Minutes from the European Central Bank (ECB) policy meeting suggested it is preparing a new cheap loan programme for banks, similar to the long term refinancing operations launched in 2016.
UK gilt yields saw sharp rises later on in the month on growing expectation that a “no-deal” Brexit would be avoided and the deadline extended. On mainland Europe, Bund yields were marginally higher. Spanish 10-year yields were two basis points (bps) lower, despite increased political risk as the country announced a snap general election. Italian 10-year yields were 16 bps higher.
Corporate bonds produced positive total returns and outperformed government bonds. High yield corporate bonds performed particularly well, while within investment grade, Europe stood out. The more economically-sensitive sectors, automotive and capital goods notably, delivered good returns.
US-dollar denominated emerging market (EM) government bonds rose, but local currency bonds fell as a number of EM currencies came under pressure on idiosyncratic factors. EM corporate bonds performed well.
Global equity markets continued on their upward trajectory in February and the MSCI World index showed gain of 3.0% (in US dollars). Convertible bonds had a strong month and moved up almost as fast as equities. The Thomson Reuters Global Focus index was up 2.4% this month. The US region has become more expensive as a result of the equity rally. Japan and Asia ex Japan continue to offer discounts to fair value.
The S&P GSCI Spot Index rose in February. The oil price rebounded from early weakness, with supply concerns returning to the fore on production cuts by OPEC and other producers, a surprise fall in US crude inventories and stronger-than-expected US economic data. The energy component as a whole was up due to oil, although the natural gas price moved slightly lower. The industrial metals component was also firmer with copper leading the gains as the US-China trade tensions moderated. Soft commodities were weak across the board and precious metals were also down.
The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.
 The eurozone purchasing managers’ index is produced by IHS Markit and based on survey data from around 5,000 companies based in the euro area manufacturing and service sectors. A reading above 50 indicates expansion.
 Investment grade bonds are the highest quality bonds as determined by a credit ratings agency. High yield bonds are more speculative, with a credit rating below investment grade.
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