Boris Johnson on Tuesday evening lost his majority in Parliament as British lawmakers defeated him in a bid to prevent taking Britain out of the EU without a divorce agreement.  This prompted the prime minster to announce that he would immediately push for a snap election.  The government was defeated by 328 to 301 votes on a motion put forward by opposition parties and rebel lawmakers in Johnson’s party, who had been warned they would be kicked out of the Conservative Party if they defined the government.  Just as Johnson started speaking, he lost his working majority in parliament when one of his own Conservative lawmakers, Phillip Lee crossed the floor of the House of Commons to join the pro-EU Liberal Democrats.  The victory on Tuesday is only the first hurdle won for lawmakers that enables them to take control of parliamentary business.  On Wednesday The British parliament voted to prevent Prime Minister Boris Johnson taking Britain out of the European Union without a deal on 31 October, and rejected his fist bid to call a snap election two weeks before the scheduled exit.  The House of Commons backed a bill that would force the government to request a three-month Brexit delay rather than leave without a divorce agreement.  Opposition Labour party leader Jeremy Corbyn said he would agree to hold an early election once the bill passed the upper house of parliament, the House of Lords, and became law, something that could happen on Monday.  He did not, however say whether he agreed with Johnson’s choice of date.  A prospective election would offer three alternatives:  a government under Johnson, a Labour government led by the veteran socialist Jeremy Corbyn who has promised a new referendum with the option of staying in the EU and a ‘hung’ parliament with a coalition or minority government.

Services In Ireland

Ireland’s services sector last month grew at its slowest rate since January, according to a survey on Wednesday amid the rising uncertainty around Brexit which was evident across all sectors.  The AIB IHS Markit Purchasing Managers’ Index (PMI) for services slipped to 54.6 from 55 in July which is still well above the 50 mark that separates growth from contraction.  It has been above the 50 mark since 2012 when a rapid economic recovery began to take hold.  Ireland’s fast growing economy has largely weathered the disruption created by the BREXIT vote in 2016 but increasing uncertainty around Brexit has contributed to weaker activity in the manufacturing and services sectors.

Italy: 5-Star Votes For PD Coalition

Wednesday saw Italy’s bond yields sliding to fresh lows as members of the anti-establishment 5-Star Movement backed a proposed coalition with the centre-left Democratic Party paying the way for a new government to take office.  The results of the online ballot of the 5-Star members, released late on Tuesday showed that 79.3 percent of members were in favour of joining forces with Democratic Party.  Italy’s bond market has rallied hard since the 5-Star and the PD reached a coalition deal last week.  The two-year Italian yields tumbled 8 bps to their lowest level since late 2017 at -0.35 percent while the five-year bond yields stumbled closer to 0 percent.  Italian bonds have also been supported by the heightened speculation that the ECB will this month cut interest rates and possibly restart asset purchases to stimulate the eurozone economy.  Meanhwile outside Italy, the eurozone bond yields were broadly higher amid a stronger risk sentiment in world markets and following upbeat Chinese economic data.

Christine Lagarde Comments On ECB And Its Strategies

As growth is on the slow side and inflation persistently below the ECB’s target, the bank has all but promised fresh stimulus when policymakers meet on 12th September.  This would be the last measure Mario Draghi could take before stepping down on 31st October.  According to Christine Lagarde, the European Central Bank still has room to cut rates if needed but this could pose a challenge to financial stability.  In this regard, a broader review of how policy is conducted may be necessary.  She said in written answers to the European Parliament’s committee on economic affairs, “the ECB has a broad tool kit at its disposal and must stand ready to act.”   The ECB is expected to cut rates deeper into negative territory in September, restart asset purchases and compensate banks for the side effects of negative rates.  According to Lagarde it would be appropriate for the ECB to have a broader strategy review, given how monetary policy has changed since the global financial crisis of 2008.

China’s Services Sector

Activity in China’s services sector expanded at the fastest pace in three months in August as new orders rose, prompting the biggest increase in hiring in over a year according to a private survey. The Caixin/Markit services purchasing managers’ index (PMI) picked up to 52.1 last month, which is the highest since May, whereas in July it was 51.6.  The index has remained above the 50 level that separates growth from contraction on a monthly basis since late 2005.  New business accelerated slightly to a four-month high, with companies citing improving underlying demand and a boost from new projects.  Meanwhile, a sub-index for export orders pulled back from July’s three-month high, possibly due to heightened US-China trade tensions.  In order to cushion the economic slowdown, Beijing has so far relied on a combination of fiscal stimulus and monetary easing including spending hundreds of billions of dollars in infrastructure and tax cuts for companies.  These measures have taken their time to impact the economy and with the trade war there might be the need for further support.

China’s Factory Activity

Factory activity in China shrank in August for the fourth month in a row amid the trade pressures from the US/China trade war and domestic demand remained sluggish, pointing to a further slowdown in the world’s second-largest economy.  The Purchasing Manager’s Index (PMI) fell to 49.5 in August (July: 49.7), said on Saturday China’s National Bureau of Statistics.  This is below the 50-point mark that separates growth from contraction on a monthly basis. Export orders fell for the 15th straight month in August although at a slower pace with the sub-index picking up to 47.2 from July’s 46.9.  Furthermore, total new orders from home and abroad also continued to fall, indicating domestic demand remained soft, despite the measures to boost growth over the past year.  The official factory gauge showed growing trade frictions with the US and cooling global demand continued to negatively impact China’s exporters.  In view of the uncertain business outlook, factories continued to shed jobs in August.

US Manufacturing Activity

US manufacturing Activity contracted for the first time in three years in August, with new orders and hiring declining sharply as trade tensions weighed on business confidence.   The Institute for Supply Management (ISM) said its index of national factory activity dropped to a reading of 49.1 last month from 51.2 in July.  A reading below 50 indicates contraction in the manufacturing sector, which accounts for about 12 percent of the US economy.  Last month marked the first time since August 2016 that the index broke below the 50 threshold.  Furthermore, the August reading was also the lowest since January 2016 and was the fifth straight decline in the index.  The United States now joins the eurozone, Japan, the United States and China which have long been experiencing a contraction in factory activity.  The ISM remains above the 43 level, which economists associate with a recession.  The ISM said there had been “a notable decrease in business confidence” adding that trade remains the most significant issue, indicated by the strong contraction in new export orders.  The US-China trade war is eroding business sentiment, and business investment contracted in the second quarter for the first time in more than three years.  In addition, as inventory swelled, manufacturing is being cut down with output declining for two straight quarters.  Meanwhile, consumers continued with their spending supporting the economy.  This could however change when the trade war spill over to shopping malls.  On 1st September a new round of US tariffs on imports of Chinese goods, mainly consumer products like clothing, footwear and televisions took effect.  Additional US tariffs are due to be imposed in December.  In a separate report on Tuesday, the Commerce Department said construction spending edged up 0.1 percent in July.  With factory data US Treasury prices rose, with the yield in the benchmark 10-year note dropping to its lowest since July 2016. The inverted yield curve signal that a recession is looming.

The US Trade Deficit

The US trade deficit narrowed slightly in July but the gap with China surged to a six-month high.  The Commerce Department said that the trade deficit dropped 2.7 percent to $54 billion as exports rebounded and imports fell.  Meanwhile the data for June has been revised downwards to show the trade gap shrinking to $55.5 billion instead of the previously reported $55.2 billion. Although in July goods exports increased 0.9 percent to $138.2 billion, with China imposing additional tariffs on US soybeans, beef and pork, exports are likely to decline in the months ahead.  China’s commerce ministry said that in early August Chinese companies had stopped buying US farm products.  Meanwhile goods imports dropped 0.2 percent to $211.8 billion.  The report from the Commerce department on Wednesday came against a backdrop of an escalation in the trade war between the US and China.  On Sunday the US and China slapped fresh tariffs on each other, increasing concerns of a global recession.

Trade War

On Tuesday US President Donald Trump warned that he would be “tougher” on Beijing in a second term if trade talks dragged on.  This has increased the fear that the trade disputes could be ongoing and could trigger a recession.  China and the US on Sunday imposed fresh tariffs on each other resulting in a tit-for-tat tariff war that unsettled financial markets.  Washington imposed 15 percent tariffs on an array of Chinese imports on Sunday, while China began placing new duties on US crude oil.   China has since lodged a compliant against the United States at the World Trade Organisation over US import duties, its third lawsuit challenging Trump’s China specific tariffs.  Meanwhile, China’s Commerce Ministry said its trade team will hold talks with US counterparts in mid-September in preparation for high-level negotiations in early October.


On Tuesday oil prices dropped by 2 percent weighed down by rising OPEC, Russian oil output and the US-China Trade war that has dragged on the global economy.  The US this week imposed 15 percent tariffs on a variety of Chinese goods and China began to impose new duties on a $75 billion target list in a trade war that has rumbled on for more than a year.  Although the trade conflict has intensified US President Donald Trump said that both sides would meet for talks this month.  Output from OPEC countries rose in August for the first month this year as higher supply from Iraq and Nigeria outweighed the restraint by Saudi Arabia and losses caused by US Sanctions on Iran.  Production of oil in Russia in August rose 11.294 million barrels per day, topping the rate cap pledged by Moscow in a pact with other producers and hitting its highest since March, data showed on Monday.


India’s gold imports plunged 73 percent in August compared with last year to the lowest level in three years amid a rally in local prices to a record high and a hike in import duty that discouraged retail buying, said a government source on Wednesday.  The lower imports by India, which is the second biggest consumer could cap gains in global prices that are trading near six-year highs.  Gold prices dropped on Thursday as sentiment changed after China and the US agreed to hold talks to end their protracted trade dispute.  Prices touched $1,557 on Wednesday, their highest since April 2013.  Gold climbed 23 percent this year amid fears of the global slowdown.

Currency Roundup

The US dollar fell off its two-year peak on Tuesday after the poor data for the manufacturing sector activity in August that raised the prospect of more aggressive easing from the Federal Reserve.  In contrary, the Chinese services sector expansion was a nice surprise, further cheering the Asian markets.  The yuan also moved in line with the firmer emerging Asian currencies edging off the 11-year lows by almost climbing 0.2 percent.  The euro rebounded on Wednesday as comments from the European policymakers introduced some doubt over the extent of the ECB’s stimulus package expected next week, while investors sold the dollar for riskier currencies.  On the same day, the pound gained in early trading as British lawmakers succeeded in seizing control of parliamentary time to try and block a no-deal Brexit.  The pound which on Tuesday fell below $1.20 and to its weakest in three-years, rose 0.4 percent to a day’s high of $1.2129 whilst against the Euro it rallied 0.3 percent to 90.53 pence. China’s yuan and the Australian dollar rallied after the news on Thursday that China-US trade talks would resume next month.   Investors sold the safe-haven yen, irrespective of the fact that the trade war would benefit Japanese exporters.  Other factors that supported risk sentiment were the chances of Britain getting out of the EU without a deal on 31st October and a potential breakthrough in the Hong Kong political crisis following the withdrawal of an extradition bill that resulted in mass protests.   Sterling held onto its gains overnight after the British parliament voted to stop a ‘no deal’ Brexit and to prevent Prime Minister Boris Johnson from calling a snap election that could have given him the mandate to keep alive the threat of “no deal”.  The pound stood at around $1.2241 and the euro at $1.1027.  Meanwhile, the resumption of the US-China Trade talks improved risk sentiment.  The Australian, New Zealand dollars, the Chinese Yuan and South Korean won all jumped against the dollar, while the yen nearly fell 0.4 percent to 106.75 per dollar its weakest in more than three weeks.

Market Wrap

On Monday European stocks closed higher in thin trading, with investors favouring defensive sectors amid the imposition of more tariffs by the US and China, while a slide in the pound helped Britain’s FSTE 100 to outperform.  The pan-European STOXX 600 closed up 0.3 percent, after the global trade disputes and recession worries drove the benchmark down 1.6 percent in August.  European shares retreated from a one month high on Tuesday as weak US factory data added to worries about global growth, while uncertainty over Brexit knocked the FTSE 100 lower after a four-day run of gains.  Two-year Treasury yields hit their lowest since September 2017, steepening the yield curve on Wednesday after expectations that growth would slow in the third quarter.  The two-year yield which moves with expectations of interest rate cuts, fell as low as 1.43 percent.  The spread between the 2-year and 1- year Treasury yields, the most common measure of the yield curve, rose to its highest since 21st August at 3.3 basis points.  The curve inverted on 14th August for the first time since 2007, an indicator of a recession.  Short dated yields fell after the US central bank’s Beige Book released on Wednesday showed the economy grew at a modest pace in recent weeks, with manufacturing effected by a global slowdown whilst consumer spending gave mixed signals on the strength of household spending.  Rising worries motivated investors to shift away from risky equities to safe-haven assets such as government bonds, resulting in yields on German and Italian 10-year bonds hitting a record low.  Trade sensitive shares of Germany .GDAXI and France .FCHI were down about 0.4 percent each, while Milan-listed shares .FTMIB closed down 0.3 percent.  Defensive sectors such as utilities and telecoms were among the few sectors that gained in the STOXX 600, while oil and gas companies led decliners with an 0.9 percent loss as oil prices sank.  After Rome moved closer to forming a new government, on Wednesday Italian stocks led a rebound in European shares.  Italy’s FTSE MIB index rose 1.17 percent touching more than a month high after the 5-Star members backed a proposed coalition with the Democratic Party, opening the way for a new government to take office.  European shares rose for a second straight day on Thursday after China said it would hold trade talks with the US, raising the possibility of a solution to end the trade war.  The pan-European STOXX 600 index rose 0.33 percent in the morning and hit its highest level since 1st August in early trading, after rising nearly 0.9 percent in the previous session.  Autoshares rose 1.41 percent and technology companies gained 1.58 percent.  German industrial orders fell more than expected in July on weak demand from abroad, data showed on Thursday.  Struggling manufacturers could head Germany into a recession in the third quarter. Germany’s trade-sensitive DAX rose 0.64 percent.   Britain’s FTSE 100 lagged the broader market and was slightly down as a number of UK companies went ex-dividend.

Malta:  Registered Unemployment July 2019

In July the number of persons registering for work stood at 1,654 decreasing by 9.5 per cent when compared to the corresponding month in 2018.  Registered unemployed dropped among all age groups, with the exception of those aged less than 20 years.  Registrants for work decreased when compared to July 2018, irrespective of how long they had been registering for work. The largest share of men and women on the unemployment register sought occupations as clerical support workers with 18.4 and 37.9 percent respectively.

Malta:  Index of Industrial Production: July 2019

In July 2019, the seasonally adjusted index of industrial production decreased by 0.6 percent.  Decreases were registered in the production of energy (8 percent) and capital goods (1 percent).  The production of consumer goods and intermediate goods increased by 2.8 percent and 0.3 percent respectively.  On an annual basis compared to July 2018, the working day adjusted index of industrial production increased by 1.3 percent.  Increases were registered in the production of consumer goods (6.5 percent) and capital goods (5.3 percent).  The production of intermediate goods and energy decreased by 5.8 percent and 4.5 percent respectively.

Antonella Mercieca

Client Relationship Manager


Bloomberg, Reuters, https://nso.gov.mt


September 6th, 2019

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