Quilter Cheviot|Weekly Comment

Stocks pull back on light economic calendar

Our weekly market overview from Quilter Cheviot

By Alan McIntosh, Chief Investment Strategist

Global equities posted negative returns in the first full week of September, with the MSCI All Country World Index ending -1.3%. A move higher in government bond yields on solid economic data, particularly from the US, weighed on sentiment.

In a holiday-shortened week due to the Labour Day, the US showed signs of tightness in the employment market with a strong initial jobless claims reading. The number of Americans applying for unemployment support fell to a six-month low, with 216k applicants. The print maybe tempered expectations a little for an imminent cooling of the US labour market after August’s payrolls number showed one of the largest increases in the unemployment rate in recent years, moving up to 3.8% from 3.5%.

Overall, the economic calendar was fairly light but the latest reading from the Institute for Supply Management (ISM) on service sector activity also suggested economic strength. New orders grew at a faster pace, albeit in part due to a rise in inventories and a clearing of order backlogs. US stock markets broadly tracked global indices although there was a notable underperformance in small caps, ending the week -3.6%. Tech stocks (-1.9%) marginally underperformed, as benchmarks were driven lower by a fall in Apple after demand concerns coming from China.  

UK stocks outperformed on the week, returning 0.2%, supported by energy majors receiving a boost from the oil price hitting its highest level of the year as international benchmark brent crude moved above US$90 a barrel. The pound edged lower against the US dollar, dipping to 1.25 from 1.26. UK government bonds held up better than global peers, with the 10-year gilt yield little changed at 4.43%. In comparison the US 10-year Treasury yield rose 9 basis points to 4.27% while the German 10-year yield increased 6 basis points to 2.61%. There was a bit of a dip lower in the short end of the UK curve after Bank of England governor Andrew Bailey suggested that a further increase in the base case this month is in doubt.

European struggles

A series of economic releases from the eurozone suggests that activity in the bloc continues to underperform the US, with growth, consumer spending and industrial production data all coming in on the soft side. The Eurozone grew 0.1% in the second quarter, according to Eurostat’s latest estimate, a slower pace than the 0.3% previously forecast. Retail sales showed a 1.0% annual decline, falling 0.2% month-on-month in July.

German industrial production also disappointed, declining for a third consecutive month. A 9% drop in auto manufacturing led to a larger than expected monthly drop of 0.8%. Despite this, the German stock market fared a little better than global benchmarks, ending the week 0.6% lower. The euro continues to trade in a narrow range against sterling, declining by a similar amount on the week against the US dollar to close at 1.07.

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