Monthly Review : January 2020

Monthly Review : January 2020


United States

The US economy grew at an annualised rate of 2.1% in the fourth quarter.  For 2019 as a whole, the economy expanded 2.3%, down from 2.8% a year earlier and its slowest rate since 2016.  Consumer spending, the locomotive of the economy, and business investment moderated in the quarter as the effects of the Trump tax cuts waned.  The labour market remained strong – 145,000 new jobs were added in December according to the nonfarm payrolls report, keeping the unemployment rate at a five-decade low of 3.5%, although annual wage growth eased to 2.9%.


Euro area

The Eurozone economy expanded just 0.1% in the fourth quarter after two of its biggest economies unexpectedly contracted – France by 0.1% and Italy by 0.3%.  For 2019 as a whole, the single currency bloc grew 1.2%, its slowest rate since 2013 when it shrank 0.2%, as it faced headwinds from Brexit uncertainty and global trade disputes.  France was also disrupted by widespread protests against pension reforms in December which had some impact on household spending. Eurozone headline inflation nudged up to 1.4% due to higher energy prices.


United Kingdom

The high street received little festive cheer as predictions of a rebound in spending failed to materialise.  The volume of goods sold in stores, and online, fell 0.6% in December, the fifth consecutive month with no growth.  The benefit of the late Black Friday discount sale on 29 November, which was included in December’s figures, may have been offset by political and Brexit uncertainty ahead of the general election.  It was also surprising given the strength of the jobs market.  The number of people in work rose to a new record high in November and earnings outpaced inflation by almost 2%.



The Swiss KOF Economic Barometer rose to 100.1 in January, up from 96.4 a month earlier and ahead of consensus analyst forecasts of 97.0.  The indicator, which aims to predict how the economy will perform in the near future, was lifted by improved prospects for international demand for manufacturing goods, particularly noticeable in machinery.   Elsewhere, the US Treasury urged Swiss authorities to “more forcefully support domestic activity” by taking advantage of deeply negative borrowing costs to boost fiscal spending and eases taxes.


Central banks:

Federal Reserve (next meeting: March 18th)

The Federal Reserve held the federal funds rate steady in the 1.5% to 1.75% range in January.  The decision was unanimous for a second straight meeting with all FOMC members agreeing to wait-and-see how economic developments unfold in the months ahead.  In its policy statement, the Fed described household spending growth as “modest”, rather than “strong”, as it had in December, and Chairman Jay Powell acknowledged the coronavirus poses substantial downside risk to the global economy.  Powell also revealed Fed officials have attended meetings of the Network for Greening the Financial System, a global network of more than 50 central banks and supervisory authorities.


European Central Bank (next meeting: March 12th)

The European Central Bank held its deposit rate at -0.5% in January and launched its first strategic review in 16 years.  ECB President Christine Lagarde pledged to “leave no stone unturned” as the bank seeks to understand how years of ultra-accommodative policy has failed to lift inflation towards its target rate.  The review will extend beyond inflation, financial stability and employment to environmental sustainability which could impact its corporate bond purchases.  Former ECB chief Mario Draghi was, controversially to some, awarded Germany’s Order of Merit, the country’s highest honour in recognition of his central role in preserving Europe’s single currency.


Bank of England (next meeting: March 26th)

The Bank of England left its key interest rate unchanged at 0.75% in January.  Going into Governor Mark Carney’s last MPC meeting, markets were pricing a 50 per cent chance of a quarter point rate cut but in the end the majority of committee members felt the recent improvement in survey data since the general election and imminent fiscal boost warranted staying put for the time being.  However, the MPC downgraded its growth forecast for this year and next to 0.8% and 1.5% due to uncertainty over future trade deals and for the first time since 2014, it omitted to say it expected “limited and gradual” rate hikes over the coming years.


Swiss National Bank (next meeting: March19th)

The Swiss Franc climbed to a near three-year high versus the Euro after the US Treasury added Switzerland to a watchlist of countries that it accuses of currency manipulation.  It noted in its semi-annual report that foreign exchange purchases by the SNB had increased markedly since mid-2019 to surpress currency appreciation.  The SNB, however, rejected the allegations and stressed interventions were not intended to give Swiss exporters a trading advantage but were a monetary policy tool aimed at boosting inflation and the economy.  President Thomas Jordan denied a new currency cap is on the table for now.


Market issues:

  • Investors sought sanctuary in safe haven government bonds as fears over the outbreak of the coronavirus grew. The universe of negative yielding bonds surged to USD 14 trillion and 10-year German bund yields fell back below -0.4% for the first time since October.  Concerns over its impact on the global economy was also reflected by a partial inversion of the US Treasury yield curve – the yield on three-month Treasury bills now exceeds that of the 10-year Treasury which has fallen to 1.5%.
  • The United Kingdom exited the European Union on 31 January and entered an 11-month transition period during which the two sides will negotiate the terms of their future relationship.  The EU reiterated its precondition for a tariff and quota free trade deal is a “level playing field” of common rules and will publish its draft negotiating mandate shortly.  The UK is pursuing a Canada-style trade agreement but cabinet ministers warned there will not be alignment with EU regulation as it seeks divergence over time to take control of its own regulatory affairs and trade policy.
  • The spread between Italian and German 10-year government bonds narrowed to around 130 basis points after Matteo Salvini’s Lega Nord party failed to unseat the incumbent Partito Democratico candidate in a vote held in Emilia-Romagna. Salvini had campaigned hard in the region since the start of the year, hoping that an upset victory in the “red-belt” of central Italy would force a snap election and bring down the coalition government.
  • Lebanon’s USD 1.2 billion eurobond due to mature in March fell below 80 cents on the dollar before ending the month at around 83 cents. Investors are uncertain of repayment as the one of the world’s most indebted countries is up against the clock to find the financial support it needs to service its debts – its debt burden of around USD 88 billion represents more than150 per cent of GDP.  The formation of a new government, three months after former Prime Minister Saad Hariri resigned as street protests erupted across the country, offers some hope it will help it find a solution before March but ratings agencies have warned an earlier central bank plan asking local holders to swap into longer dated bonds would be considered a selective default.



Credit Markets:

  • Moody’s changed its outlook on Banca Monte dei Paschi di Siena’s senior unsecured debt (Caa1) and deposit (B1) ratings from negative to positive, reflecting the improvements in the bank’s asset quality and funding profile – it’s pro-forma problem loan ratio fell from 18% to around 12.5% last year after it sold EUR 3.8 billion of non-performing loans. The improvement enabled Monte Paschi to raise EUR 400 million from the sale of 10-year subordinated Tier 2 notes in January at a cost of 8%, six months after it paid 10.5% to sell a similar Tier 2 issue.  The new issue was more than two times oversubscribed and its price has risen around 4 points since launch.
  • Royal Dutch Shell (Aa2/AA-) reported an almost 50 per cent fall in fourth quarter profits as fears of a global slowdown weighed on oil and gas prices. Full-year earnings declined 23 per cent to USD 16.5 billion which could derail its plan to complete a USD 25 billion share buyback plan by the end of this year – Shell will scale back share purchases to USD 1 billion between now and 27 April, compared with USD 2.8 billion in Q4 2019.  Whilst profits and cash flow fell, Shell reported production of 2.8m barrels of oil equivalent during the quarter, in line with the same period a year earlier.  The company is aiming to sell more than USD 10 billion of assets this year to meet debt reduction targets.
  • Intu Properties announced it had triggered a covenant in its GBP 480 million bond issue backed by the MetroCentre in Gateshead, one of Europe’s largest covered shopping and leisure centres with more than 300 stores. The loan-to-value (“LTV”) calculated on 31 December rose to 71%, exceeding the 70% level which constitutes a “trigger event”, and will restrict cash distributions to the parent company.  Intu had already revealed it is a targeting an equity raise in February to shore up its balance sheet and it will receive EUR 145 million from the sale of the intu Asturias shopping centre in Oviedo, which it owns in a joint venture with the Canada Pension Investment Plan Board.
  • Aston Martin (Caa1/CCC+) bonds climbed to their highest level since July after a consortium led by Formula 1 billionaire Lawrence Stroll acquired a 16.7% stake in the luxury car marker for GBP 182 million, or GBP 4 per share. A fully underwritten GBP 318 million rights issue will follow which will increase the consortium’s total investment to GBP 235 million and its stake to 20%.  Proceeds from the rights issue will be used to ramp-up production of the DBX, Aston Martin’s first sport utility vehicle, and the company will push back investment in electric vehicles from 2022 to 2025.  Lawrence Stroll will assume the role of executive chairman and the Racing Point F1 team, of which he is a part owner, will be rebranded as Aston Martin F1 from the 2021 season for an initial 10-year term.

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