Monthly Review – February 2018

Monthly Review – February 2018


United States

At the beginning of February, the release of the US average hourly earnings, which rose the most since 2009, caused market participants fear the return of inflation. This ignited a sharp selloff in the equity markets and marked the return of volatility. CPI rose faster than expected in January, which added to the concerns. The US trade deficit widened the most since 2008, helped by strong consumer spending, reflecting the lack of success of the Trump administration efforts to curb US imports, which he set as a campaign promise.

Euro area

Factory orders in Germany increased 3.8% MoM, supported by strong domestic spending and global trade, Eurozone Composite PMI numbers retreated slightly from January readings, but remained solid. Despite these strong numbers, German business confidence fell the most in more than five years, a move that might be the consequence of the uncertainties surrounding the future of the political landscape, where an alliance between the CDU and the SPD must be approved, with the threat of seeing new elections if an agreement could not be found.

United Kingdom

Economic figures were mixed in the United Kingdom this month. The Country’s GDP quarter’s growth was revised downwards for the fourth quarter of 2017 to 0.4% from an initial estimation 0.5%. On the other hand, inflation remained at elevated levels at 3.0% and shown no signs of abating. A situation making things complicated for policymakers. The UK unemployment rate rebounded from its lowest level since the mid 70’s to 4.4% for the 3-month period to December.


Consumer confidence pointed at a 7-year high and the unemployment rate is at 3.3%, suggesting a strong economy. This sentiment was confirmed by the KOF business tendency survey that rose further in January. However, the Consumer Price Index growth figure of 0.7% does not demonstrate any significant pick-up in inflation. Switzerland was not spared by rising rates around the globe, the Swiss 10 years Government yield spending its second month in a row in positive territory.

Central banks:

Federal Reserve (next meeting: March 21st)

The Fed January meeting minutes were released, in which the tone was somewhat hawkish, acknowledging a strengthening economic outlook which is raising the likelihood of further gradual firming. Later in the month Federal Reserve Chairman Jerome Powell testified in front of congress, his first public appearance, where he said that “the FOMC will continue to strike a balance between avoiding an overheating economy and bringing price inflation to 2% on a sustained basis”, in line with what was previously mention in the Fed minutes.

European Central Bank (next meeting: March 8th)

In its January meeting minutes, released this month, the ECB expressed concern about the US openly backing a weaker USD, citing “recent statements in the international arena about exchange rate developments and, more broadly, the overall status of international relations”, as well as “The importance of adhering to agreed statements on the exchange rate”, probably referring to competitive devaluation. Members also noted they were increasingly confident about the path of inflation, whose target is still set at 2%.

Bank of England (next meeting: March 22nd)

The BoE met on February 8th and left the UK Bank rate unchanged at 0.5% in a unanimous vote. The decision was somehow dovish, but the language was hawkish. They also mentioned that were UK economy evolves in line with their projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent. The committee also decided to maintain the status quo on the actual GBP corporate and government bond purchase program.

Swiss National Bank (next meeting: March 15th)

Some market participants mentioned the possibility of the SNB intervening in the currency market, which is a recurrent theme. However, Thomas Jordan reiterated that balance sheet and monetary policy normalization were not yet on the table. The SNB also signed a swap agreement with the Bank of Korea, which will help the SNB diversify its currency reserves. The swap agreement enables Korean won and Swiss francs to be purchased and repurchased between the two central banks, up to a limit of KRW 11.2 trillion, or CHF 10 billion.

Market issues:

■ US Average hourly earnings annual growth was 2.9%, the biggest number since June 2009, suggesting inflation is accelerating.
■ On February 5, the Dow Jones Industrial Average lost close to 1600 points intraday, the most since inception, for finally closing 4.6% lower.
■ Volatility was at the centre of attention this month, with many observers questioning the upside potential of developed stock markets.
■ This volatility spike led to a free fall of the ETFs betting against it, forcing some issuers of such products to close their funds and liquidate them.
■ Many market observers are starting to get worried by high levels of corporate debt coupled with tightened credit conditions.
■ In Europe, Latvia’s ABLV Bank was accused by US authorities of money laundering, bribery, and breaching the sanctions against North Korea. The ECB later took the decision to shut the bank down.
■ The White House is considering appointing Loretta Mester, president of the Federal Reserve Bank of Cleveland, as the vice-chair of the Fed’s reserve board of Governors.
■ Ray Dalio, manager of the world’s biggest hedge fund, Bridgewater Associates, took a USD 21.65bln bet against Europe biggest companies.

Credit Markets:

■ Viridian Group, an Irish electricity power company, saw the price of its GBP and EUR bonds tumble, when they announced their plans to close two power plants they operate, because of their inability to win a supply contract with the government.
■ Teva Pharmaceutical troubles continued, as it was cut to junk by S&P, to BB from BBB-, as the competitive environment continued to worsen.
■ Gategroup, a name favored by CHF high yield investors, got its long-term issuer credit rating lowered to B- by S&P with a stable outlook. It however later reported strong results, and parent company HNA indicated its intention to list the company on the Swiss exchange as soon as March 2018.
■ Arcelor Mittal, a name widely held amongst retail investors, was raised to investment grade by S&P, due to “prudent balance sheet management and supportive market conditions”.
■ The US brick and mortar retail sector continued to suffer, with the bankruptcy of Bon-Ton stores, a department store with 267 outlets.
■ Qualcomm said they would consider the Broadcom takeover if the bid was raised to USD 160bln. The initial unsolicited bid of 130bln was unanimously rejected by Qualcomm.
■ Diversified Miners, such as Rio Tinto, BHP Billiton, Anglo American and Glencore, which was once under severe financial pressure, all reported record results and generous dividends, after years of low shareholder returns.
■ Indian bank securities were under selling pressure, after a 2bln fraud was discovered at Punjab National Bank, which had the potential to have repercussions across the whole market.
■ Dish Network Corp, suffering competitive pressures and subscriber losses, as well as increased leverage, was downgraded to B from B+ by rating agency S&P.
■ US cable giant Comcast Corp offered GBP 22bln to acquire Sky, the UK and European broadcaster, from media mogul Rupert Murdoch.
■ Fiat Chrysler Automobiles said it will phase out the production and commercialization of diesel engine, in passenger vehicles, as consumers a turning away from this fuel type.
■ On February 12th, the Emerging Markets Trading Association (EMTA) recommended that PDVSA’s bonds should be traded without accrued interest.
■ SoftBank group is in talks with reinsurer SwissRe regarding a potential minority investment in the Swiss company.
■ Oi SA bonds exchange deadline was initially set for February 26th, it has been extended to March 8th, bonds are trading in t+1 and bidders need the delivery to be guaranteed and if not, the buyer reserve himself the right to cancel the trade.

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