After a pretty turbulent few trading days last week, investors head into the last full trading week of 2018 in a somewhat cautious fashion. Investor’s main concerns remain centred around political stability and economic weakness, after disappointing economic data out of Europe, China and Japan last week.
While the US has continued to outperform there is a concern that even here the sugar rush of the January tax cuts might well start to see economic activity fade sharply into 2019.
Asia markets nonetheless have started the new week on a mildly positive note as we look ahead to the Bank of Japan and US Federal Reserve rate meetings later this week, though this hasn’t translated into a positive start for markets in Europe which have started on a slightly weaker note.
The Italian government continues to show no signs of reducing its budget below the 2% level demanded by the EU Commission though they have said they’ll reduce it to 2.04% of GDP from 2.4%, though saying it is one thing, doing it is another.
Last week ECB President Mario Draghi signalled the ECB’s intention to end its asset purchase program on schedule at the end of this month, while acknowledging that downside risks to the economy has increased. He also said that underlying inflation was expected to remain muted and cut the ECB’s inflation forecast for 2019 from 1.7% to 1.6%.
At the same time he went on to say that he expected inflationary pressures to rise, helped by rising wages. This does come across as rather optimistic given that core inflation has never risen above 1.2% in the last ten years, with today’s final headline CPI numbers for November expected to come in at 2%, down from 2.2% in October, with core prices at 1%.
Concerns about the retail sector continued over the weekend on reports that high street footfall was down on the same period last year. This also appears to be extending into the on line space after on line retailer ASOS saw its shares drop sharply this morning after reporting that while total sales for the year were up 14%, it was cutting its full year sales guidance from an increase of 20-25% to 15% citing a poor November with margins falling sharply.
The company said the decline in margins was down due to a high level of discounting and increased promotional activity in order to shift stock, as average selling prices declined partly due to unseasonably warm weather during the last three months of the year. The company also said it would be reducing its capital expenditure to £200m. On line peer Boohoo.com has also seen its shares slump in sympathy on the back of this morning’s announcement.
Swedish retail H&M has also slipped back on the open despite reporting its fastest quarterly sales growth in three years. Revenues rose to $6.2bn slightly above expectations but there is some pessimism that these sales may well have been achieved at the expense of heavy discounting.
In other news energy provider SSE announced that it would no longer be pursuing its planned merger of its energy services division with NPower citing the governments energy price cap as one such reason. The company also said that the cost benefits of doing the deal would likely be outweighed by the costs of integrating the two businesses. Management said they were still keen to demerge the energy services part of the business, with the option of a sale or a stand-alone demerger.
US markets finished the end of last week firmly on the back foot despite a slightly more encouraging atmosphere around the trade talks with China. Concerns about a slowing global economy and a weakening Chinese economy has hit sentiment in recent weeks and there is a concern that this week’s Federal Reserve rate meeting could add to this if US central bank officials don’t soften their rate outlook for 2019 against a global backdrop that looks quite a bit darker than it did a few weeks ago.
An inverting yield curve is causing some anxiety about the prospect of a slowdown or impending recession with some investors looking as to whether Fed officials recognise this as a reason for them to become more cautious in their rate outlook for 2019.
On the data front we have the latest Empire manufacturing survey which is expected to slip back to 20 1 in December.