Weekly market recap – Factory fever

US markets stay quiet over thanksgiving weekend, while China shows unexpected rebound in economic activity.

FacebooktwitterlinkedinmailFacebooktwitterlinkedinmail   by Tertius Bonnin, 29th November 2019

If you thought the BBC Parliament channel may have shown examples of flagrant disregard for parliamentary process by politicians over the past few months, you’ve seen nothing yet! Italian MP Flavio Di Muro ask his girlfriend to marry him in the Italian parliament last week during a debate on earthquake aid. Fortunately, the less than enthusiastic Speaker of the chamber was quick to reprimand Di Muro, telling him off for a misuse of an intervention.

Sadly Italian equities didn’t erupt with the same level of passion and flare, with most regions notching modest positive gains. Asset class returns in sterling and local currency are below; a long Thanksgiving weekend saw muted trading volumes and quiet markets as investors and traders in the US enjoyed some time off.

Table 1: GBP total returns

Source: Bloomberg

Table 2: Local CCY total returns

Source: Bloomberg

All in all, last week was a pretty boring week for markets in comparison to the recent past as investors and traders in the US took a long Thanksgiving weekend. I found my post from this time last year and I have to say, I’ll happily take boring markets over angry ones. Even data released during the week was relatively insignificant for markets as it came in broadly in line with expectations. It wasn’t until Saturday that things begun to get more interesting as two bits of data emerged from China showing a modest but unexpected rebound in economic activity. China’s National Bureau of Statistics pointed to a pick-up in domestic demand following a number of stimulus measures implemented by Beijing to support growth

Chart 1: November’s reading was the highest in seven months and marks a return to expansion within China’s manufacturing sector

Source: Bloomberg

Despite this glimmer of optimism, weak manufacturing data (discussed last week) across other developed economies has highlighted the rising headwinds for China’s manufacturing sector. When we dig into Sunday’s data release, we see a growing divergence between new orders (e.g. domestic + external demand) and new export orders (external only) which is being experienced by Chinese factories. The significance of the fall in export orders is shown in the char below where new orders recently contracted at the fastest pace since 2009. Total new orders was only kept afloat by strong domestic demand.

Chart 2: While export orders contracted in March at their fastest rate since the GFC, domestic demand has helped keep total new orders in expansion territory

Source: Bloomberg

So what does this all mean? Well in short, China is not about to fall into a recession. With “phase one” of a trade deal between the US and China nearing completion, it is broadly expected that ratification will result in an easing of tensions. That said, both the US and Chinese administrations have been anything but predictable since the trade war began.

STAT OF THE WEEK: £837 million – the minimum estimate of how much Brits spend on unwanted online subscriptions in 2018 (YouGov).

Data correct as at: 29/11/19

About the author: Tertius Bonnin

Tertius joined EQ in 2016 and is responsible for covering investment ideas within US, Global and Thematic equities. He sits on the fund selection committee and also supports the portfolio managers across a range of other responsibilities.

He passed Level I of the CFA exam in 2018, holds the Investment Management Certificate and has a BA in Business with Finance. He enjoys a variety of sports including skiing, cycling and running – and when not in the office he experiments with Asian cuisine.

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