Market Update
Positive trade sentiment has boosted confidence throughout the market during the past week with China and the U.S. continue to work on narrowing their trade differences. Additional good news came from the Chinese economy with the release of better than expected economic growth figures. Its economic growth recorded 6.4% for the first quarter of this year as factory production picked up significantly and Industrial production surging by 8.5%.
The positive attitude was further supported when JPMorgan started the US bank earnings season to a stronger-than-expected start which helped to boost the US-stock market with the Dow Jones Index reaching new highs for the year and the Index is only 2% away from its all-time high. The Spring IMF/World Bank meetings on the weekend also ended with an air of cautious optimism. While the IMF did cut its forecast for growth, the risk of a recession remains low, which further supports our more optimistic view of the global markets.
The string of better global news also had a flow-on effect on the Australian Bond market with yields slowly moving up along the whole yield curve. The Australian 10-year government bond yields moving from a recent low of 1.72% up to 1.97% and the 5-year rates moving up from 1.41% to 1.56% which is just slightly above the official cash rate of 1.5%. In a recent speech by the Deputy Governor of the RBA made some comments of the unusual global and domestic developments which underlines the wait and see approach from our Central Bank. (Link to speech here)
European Desk
The biggest headline out of Europe came once again from the UK, where EU leaders agreed for the Brexit to be delayed until the end of October under a plan to avoid a chaotic no-deal split, risking six more months of political uncertainty over Britain’s ties to the European Union. The response from the UK financial markets was muted as most market participants have already priced in all possible outcomes.
We also finally saw some reversals in the European bond space and the yield on the benchmark German 10-year government bond were reaching three-week highs printing once again positive yields of 0.068%. Some of the reason behind this reversal was that investors were buoyed by the rebound in Chinese exports and positive company earnings in Europe and the US. This provided confidence that the global economic outlook is not as bad as expected.
European banks continued to work on their restructuring and the French bank Société Générale confirmed that it will be cutting 1,600 jobs in investment banking arm and corporate units as a measure to boost profitability following a difficult 2018. Total layoffs will account for about 10% of their entire labour force but also cuts out the least profitable units (proprietary trading) which have recently been slammed by increased regulations and requiring higher capital than before. This will help the banks to free up some €10 billion in capital as part of its restructuring.