Financial Bulletin – February 2020


Developments during the first month of the year signalled that the world economy may have turned a corner after a subdued 2019.

Following on from a decisive General Election result, business and consumer confidence in the UK noticeably improved.

The US economy, meanwhile, continued to accelerate and fears of a recession receded fast.

The Eurozone, on the other hand, was one region of the world which failed to join in with the wider trend, although the manufacturing sector recovered somewhat. 

One of the few negative developments during the month was the spread of a new virus, emanating from China, which had claimed the lives of more than 100 people by the end of January.

Investors began to start questioning whether the outbreak could become a worldwide pandemic, which caused a significant fall in stock markets during the last week of January.

However, the generally better economic outlook, coupled with the fact that Central Banks show no inclination to raise interest rates soon, resulted in solid gains for most stock markets over a 6 month period.

Over the last 6 months the FTSE 100 lost around -3.94%, whilst the Euro Stoxx 50 and S&P 500 gained around 4.32% and 9.21%, respectively (all in price terms). 

The broad Emerging Markets index returned approximately 3.69% (in US$ price terms).

The Japanese Nikkei 225 gained approximately 7.73% (in price terms).

Most key government bond yields have fallen over the 6 months, particularly towards the end of January as the Coronavirus began to spread.

US Economic News

The US economy continued to recover from the ‘soft patch’ it endured during the summer of 2019.

The latest surveys suggested that output during January accelerated at the strongest rate for 10 months as business confidence edged higher.

Unemployment remained at an historically low rate of 3.5% and some companies reported that it has become difficult to fill vacancies.

This is a potentially important development and one which investors will likely monitor closely, as it could mean upward pressure on wages and inflation.

During December the headline rate of inflation rose to 2.3%; the highest since 2018.

Although most market commentators believe that an interest rate rise is unlikely in the near future, if inflation continues to creep higher, then expectations of a rate rise could grow.

UK Economic News

The decisive General Election result removed some, though by no means all, political uncertainty and this seems to have caused an increase in business and consumer confidence.

The manufacturing sector was stable during January, which marked the first time since April last year that the sector did not contract.

Businesses reported an increase in orders and activity following the election result.

An upturn was also witnessed in the dominant services sector, which is estimated to have improved at the fastest rate for almost a year-and-a-half.

Prior to the release of the manufacturing and services figures, investors had spent most of the month worrying about inflation, which fell to the lowest level since 2016.  

This caused some to question whether the UK economy was becoming fundamentally weaker, and expectations of an interest rate cut rose.

However, in Mark Carney’s final meeting as Governor of the Bank of England, the committee voted 7-2 against cutting interest rates.

In a further sign that the removal of some political uncertainty may have given the UK economy momentum, house prices grew at the fastest rate in more than a year, according to Nationwide.

However, towards the end of the month Boris Johnson indicated that the government would be prepared to walk away with no trade deal in place with the EU if the EU insisted on a “level playing field” provision.

This highlighted that political uncertainty remains heightened.  

Eurozone Economic News

The building of economic momentum was also witnessed in the Eurozone during January, but to a lesser extent.

Whilst the health of the manufacturing sector improved somewhat, it still contracted at a fairly sharp rate.

Perhaps more importantly, however, sentiment amongst Eurozone manufacturers reached the highest for almost a year-and-a-half, signalling that the brighter outlook may not just be a flash in the pan. 

The unemployment rate across the currency union fell to 7.4%, which is the lowest since May 2008 and before the worst of the financial crisis.

The improvement in outlook for the Eurozone could not have come soon enough, as figures show that the economy expanded by just 0.1% in the final quarter of the year; the weakest expansion since 2013.

The brighter outlook, together with a small increase in inflation, means that the European Central Bank is unlikely to introduce more stimulus measures for the time being.

Wider Economic News

The Chinese economy grew by 6.1% in 2019, which represents the worst rate of growth for almost 30 years.

However, as has been noted many times, a slowing growth rate is inevitable as the Chinese economy matures and moves away from exports towards consumption.

Most economic developments were overshadowed though, by the outbreak of the Coronavirus which had killed more than 100 people by the end of the month.

It is impossible to say how widely the virus will spread, but the authorities’ response in terms of shutting down transport links and businesses could begin to have a serious impact on the economy.

In contrast to other regions of the world the Japanese economy remained subdued during January.

The manufacturing sector has now contracted for 13 months in a row, and retail sales fell by more than expected.

Financial Markets and Corporate News

Most major stock markets have made solid gains over the past 6 months, but gave up some of those gains in the final week of January.

Over 6 months the FTSE 100 lost around -3.94%, whilst the Euro Stoxx 50 and S&P 500 gained around 4.32% and 9.21%, respectively (all in price terms).  

Japan’s Nikkei 225 returned approximately 7.73% (in price terms).

The broad Emerging Markets index fared returned approximately 3.69% (in US$ price terms).

Over the same 6 month period, UK Gilts have been volatile on the back of political uncertainty, whilst 10 year US Treasury bond yields have fallen as interest rates fell.

The Investment Association (IA) UK Gilts sector returned 3.43%, the IA Corporate Bond sector returned 3.57%, whilst the Sterling High Yield sector returned 2.73%.

Source: FE Analytics

Summary of Key News:

  • There were further signs that the world economy is recovering.
  • Surveys in the US pointed to stronger growth and inflation rose.
  • UK business confidence rose.
  • The BoE kept interest rates unchanged.
  • Business confidence in the Eurozone picked up.
  • An outbreak of a virus emanating from China could undermine the Chinese economy.
  • The Japanese economy remains in the doldrums.  

Financial Markets:

  • Over 6 months the FTSE 100 lost around -3.94%, whilst the Euro Stoxx 50 and S&P 500 gained around 4.32% and 9.21%, respectively (all in price terms).
  • The Japanese Nikkei 225 returned approximately 7.73% (in price terms).
  • The broad emerging markets index returned approximately 3.69% (in US$ terms).
  • The (IA) UK Gilts sector returned 3.43%, the IA Corporate Bond sector returned 3.57%, whilst the Sterling High Yield sector returned 2.73%.


There are increasing signs that the world economy has moved on from the weakness witnessed last year. However, there are several factors which could derail this momentum.

The Coronavirus outbreak could begin to seriously undermine economic activity in China and the wider world, if it spreads.

In addition, political uncertainty remains elevated; the US Presidential Election later this year is already effectively under way with some investors concerned about the prospect of a Bernie Sanders Presidency.

On the other hand, the re-election of President Trump is likely to mean a renewed focus on a “trade war” with China and Europe.

The UK and the EU are about to embark on trade negotiations which, if they break down, are likely to scupper activity and confidence on both sides of the Channel. 

For now, though, there appears to be a brief window in which the world economy is recovering and Central Banks are not tightening policy.

One caveat is that what ultimately drives stock markets is company earnings, and on this count some investors are worried that earnings growth forecasts are too optimistic.

Therefore, behind the political noise, the general direction of markets may depend on whether companies can continue to meet the expectations placed on them.