This week we look at the impact Italy’s budget planning, three pieces of news coming out of the UK, EU and US, and flag three upcoming data releases. We also highlight a recent change in our emerging markets allocation.
Italy’s coalition government has agreed that its new budget will be 2.4% of GDP, higher than the 2% level that the economy minister, Giovanni Tria, had tried to keep spending below. It is considerably higher than the 0.8% that the previous government had committed to, as it sought to rein debt levels below its current 131% of GDP. While the number is below the maximum 3% set by the EU, the decision is coming under criticism from EU officials who want Italy to stop adding to its debt. The news hit Italian bonds, with the yield on 10-year bonds rising above 3%.
UK manufacturing growth improved slightly at the end of Q3 according to the IHS Markit/CIPS purchasing managers' index (PMI) which rose to 53.8 last month, up from 53.0 in August. Rates of expansion in output and new orders gained traction, while new export business saw a modest recovery following August's solid contraction. On the price front, rates of input cost and output charge inflation both strengthened. The latest numbers mean that the PMI has remained above the neutral 50.0 mark for 26 months. Brexit, meanwhile, continues to weigh on the outlook.
The EU’s manufacturing growth slowed further to a two-year low at the end of Q3, providing another sign that the escalating trade war between China and the US is also hurting factories elsewhere. IHS Markit’s September final manufacturing PMI dropped to 53.2, down from August’s 54.6 and a touch below a flash reading of 53.3. Manufacturers are increasingly concerned about barriers to global trade, which was clear with the readings of forward-looking survey indicators. The new export orders index fell to a more than five-year low of 50.2 from 52.0.
The US Federal Reserve (Fed) raised benchmark interest rates by 0.25% on 26 September, to a range of 2%-2.25%. The committee also flagged that they are likely to raise rates again before the end of the year, and has indicated that rates may rise as many as three times in 2019. In addition, the Fed’s language has changed as policy makers have stopped describing their approach as “accommodative”. While Wednesday's rate rise reflected the Fed's confidence in the US economy, with the Chair, Jerome Powell, describing it as a "particularly bright moment", the increase was criticised by President Trump, who wants businesses to be able to borrow money more cheaply.
At the end of August, the 7IM Investment Team reviewed their allocation to India. At the time of review, India had outperformed the Emerging Markets (EM) Equity Index by 10% year-to-date, in US Dollar terms, and the team saw no further upside.
In addition, it was believed that the Indian election due to be held in April 2019 may result in some short term volatility. As a result, the team decided to switch out of the Indian equity position and into the broader EM Index. Since the trade, the EM Index has outperformed India by 8.31% (again in US Dollar terms).
Outside of this trade, the team continues to monitor the allocation to EM, looking for any signs of contagion, as well as for the portfolio as a whole.
THREE ANNOUNCEMENTS DUE THIS WEEK
03 Oct – UK Services PMI (Sep) // 03 Oct – EU Services PMI (Sep) // 05 Oct – US Balance of Trade (Aug)
SOURCES: IHS, ONS, REUTERS, 7IM
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