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Market news - 8 February 2019

by  Niloofar Rafiei  |  08 Feb 2019

Europe

  • German industrial production came in below consensus +0.2% (ex. construction) over the month after a significant contraction (-1.3%) in November. Production of transport equipment and chemical pharmaceutical products were the drivers of any increase in output, as the auto sector begun recovery from the ongoing disruptions caused by the new emissions standards. The volatile construction sector shrank by more than 4% over the month.
  • At their winter meeting this week the European Commission downgraded its growth forecasts for the region’s major economies, warning that Brexit and the slowdown in China may cause growth to stall further. The Commission is now projecting just 1.5% GDP growth across the euro area this year, -60 basis points from its previous November forecast. Italy saw the biggest downgrade in forecasts, -100 basis points from 3 months ago, whilst Germany and the Netherlands also saw -70 basis point revisions. The commission explained, "Much of the euro area’s loss of growth momentum can be attributed to fading support from the external environment, including slower global trade growth and high uncertainty regarding trade policies", but also cited country-specific factors such as Italy’s political instability and the violent protests in France, as reasons for the downward revisions.

India

  • The Reserve Bank of India surprised with a 0.25% rate cut from 6.50% to 6.25% at the inaugural meeting of incoming Governor Das. The Committee voted 4-2 in favour of the cut and voted unanimously to change its policy stance from “calibrated tightening” to “neutral”. The move is likely to please Prime Minister Modi, as he makes a final push for faster economic growth ahead of the upcoming parliamentary elections (due sometime in April – May this year).

Rest of World

  • This week saw a synchronised shift in stance from a number of global central banks in the wake of the US Federal Reserve’s dovish tilt policy shift last week. The Reserve Bank of Australia’s meeting and subsequently released Statement on Monetary Policy signalled a shift from a hawkish to a more neutral stance. The RBA said that above-trend growth and rising inflation can still be “reasonably expected”, whilst citing growing downside risks to global growth. The Central Bank of Mexico voted unanimously to keep rates on hold at 8.25% and the accompanying statement had a less hawkish tone than at the previous meeting in December, although it does still see the balance of risks to inflation as being to the upside. The Bank of England downgraded its forecasts for UK growth and inflation and further rate hikes are firmly on hold for now in view of the uncertainty over the Brexit process.
  • Markets took a “pause” this week from their strong start to 2019, with equities softening into the weekend and the US dollar regaining some ground. Much of Asia was closed for the whole week for Lunar New Year.