Market Updates

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Turbulent Markets take a Breather
Last week has been broadly positive, with a lull in the news cycle that has allowed the market to catch its breath. Ongoing trade talks between the US and China are being viewed positively, although there is no guarantee they’ll produce anything concrete. While the US government remains shut down, it doesn’t appear to be having an impact outside of those unfortunate enough to be stuck in the middle. This might change if the shutdown lasts past the end of the month when it could cause a delay in people receiving their tax refunds, which incredibly includes around 80 per cent of tax payers.

Elsewhere, the brief hiatus called last month is over and the government is back to getting its backside handed to it over the withdrawal agreement. The most interesting development so far has been the Grieve amendment, which forces the government to hastily come up with an alternative if the deal is defeated. This has effectively taken away the PM’s only viable strategy of running the clock down and forcing her deal through at the end. Given that all sides of the argument hate her deal equally, this should be win-win. Brexiteers are furious.

Commodities: Gold Rush cools as trade talks continue
Gold prices cooled last week following gains made towards the end of last year. Investors rushed to park their money in the safe-haven to avoid turbulent markets (volatility for the S&P 500 more than doubled last year in comparison to 2017) and concerns of a global slowdown this year. Three days of trade talks last week between China and the US has renewed investor optimism with the S&P 500 and FTSE 100 up 2.15 per cent and 6.08 per cent respectively.

One commodity benefitting from ongoing trade negotiations is Oil. The WTI crude oil futures finally breached the $50 mark with Brent crude surging up 8.48 per cent last week. Another factor for Brent crude’s rise is the OPEC- Russia agreement starting to be priced in. Oil supply cuts were announced earlier in December and usually take around six weeks to come into effect.

UK: Retailers suffer worst Christmas sales in a decade
It was a tough end of year for shops with retail growth stalling in December as customers refrained from a Christmas spending spree. There was no change in year-on-year sales figures and like for like sales contracted by 0.7 per cent. With the threat of a Brexit no-deal looming and business rates set to rise again this year following a tweak in formulae, bricks and mortar stores are in for a challenging start to 2019.

Individually, Halfords issued a financial year end profit warning while Debenhams Christmas sales figures dropped by three per cent – Debenhams shares have tanked 85 per cent in the last calendar year. Finally, M&S maintained its full year profit forecast as poor store sales were offset by stronger performance online. One retailer navigating the challenging market conditions well is Tesco. The retailer’s like-for-like sales grew by 2.2 per cent over the festive period as consumer appetite for groceries remained undiminished. The purchase of Booker is also starting to pay off with sales for the wholesaler up 6.7 per cent.

Eurozone: Will Germany enter a technical recession?
Speculation is mounting as to whether Germany will enter a technical recession once the GDP figures for last quarter are published. The country posted a contraction of 0.2 per cent for Q3 last year and the latest industrial data points strongly to a similar story for Q4. Industrial production dropped by 1.9 per cent between October and November capping a hat trick of consecutive monthly losses for the indicator. Internal manufacturing orders remained relatively unscathed but external orders were weaker than expected as rising protectionism from the US continues to harm trade.

In similar fashion, the Eurozone economic sentiment indicator fell by two points last month in comparison to November. While the size of the drop may not ordinarily warrant much concern, this marks the 12th time the indicator has fallen in 2018. Unemployment levels for the Eurozone tightened to a decade-low rate edging down slightly to 7.9 per cent for the month of December.
Author: FE Analytics
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Last week the markets have started the new year as they ended the old one, with some wild price swings. After a December that blew apart the Santa Rally story by posting the worst returns of the year for the first time, and in doing so ending a reliable easy week before Christmas story topic for journalists (and analysts) everywhere, we’re now watching for the demise of the January effect. The phenomenon, where small caps outperform large caps at the start of the year, could be on shaky ground as well despite a positive opening few days.

This is perhaps unsurprising; 2019 is starting off with some major challenges, the US government remains shut down, Brexit remains uncertain and trade wars are hurting global growth. While all these things have the potential to resolve themselves in the next few months, they equally have a chance to drag on for the whole year and do some serious damage. The potential for things settling down in the near term look limited. The market is right to be worried.

Apple further sent global equity markets into sell-off as the company issued a warning on weak revenues, blaming the Chinese economic slowdown and fewer people in the developed world upgrading their iPhones to new models. The company expects a shortfall in revenues of as much as ten per cent from its previous estimates. The news wiped more than nine per cent from the company’s market capitalisation, relegating it to fourth largest company in the world, just behind Alphabet, having been number one a few months ago. The warning sparked share price falls amongst Apple suppliers across the world.

Equity investors are more accustomed to negative news from Tesla. The company’s shares fell sharply, dropping more than seven per cent, reflecting further concerns about its capacity to deliver on its Model 3 program. The week before last, Tesla said it had delivered fewer new vehicles in the final three months of 2018 than the market had expected. Mr. Musk also started the new year under closer watch from regulators after his misleading tweets last summer about a possible buyout of the company.

Chinese industrial companies reported a fall in profits for the first time in nearly three years, as China tries to rebalance its economy towards consumption and services. Data showed industrial profits declined 1.8 per cent in November compared to a year earlier. Analysts said the profit slowdown partly reflected Chinese businesses pulling back on investment in anticipation of the weaker domestic economy and trade tensions with US and other trading partners.

This further confirmed the need for fiscal stimulus to rejuvenate a slowing Chinese economy. Chinese top economic policymakers promised more tax cuts and increased infrastructure budgeting at the end of their annual planning meeting in December. They announced an increase in bond sales to fund infrastructure projects, including $50bn in subway and light rail projects in Shanghai and Hangzhou. Policy makers have also suggested relaxing barriers for foreign investors to invest in Chinese financial markets, although these announcements have been made before without materialising.

Financial markets have recently given little clarity in the direction they will be heading in 2019. Major equity benchmarks and oil prices rose by the most in almost ten years on Wednesday 26th December, retracting some of the losses from a turbulent runup to Christmas. The Dow Jones gained five per cent in a single session, while the Nasdaq Composite jumped 5.9 per cent. It marked the best day for each index since March 2009. Technical factors mainly explain this rise, as pension funds bought $100bn of stocks over the year-end period, as they rebalance their portfolios.

Safe havens have quickly resumed their leadership in 2019 however, after finishing 2018 as the only assets in positive territory. Gold prices surged to a six-month high in response to political uncertainty and fear of recession. The flight to safety also coincided with a stronger Japanese yen against US Dollar. The Dollar was also hit by developments in Washington, as Congress and the White House enter another phase of negotiations to bring an end to the US government shutdown.
Author: FE Analytics
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Last week pretty much sums up the year; a lot of noise and drama and we’ve ended up back where we started. The challenge to Theresa May dominated the airwaves for two days, but despite seeing off the challenge, nothing about Brexit has fundamentally changed. While the PM is temporarily safe from her own party; she still has a deal nobody wants and seems unlikely to get any material change from the EU, who are just as fed up with the whole process as we are. We still think that May’s strategy is to run the clock down and try and force something through at the end. Other scenarios involving a referendum or election require too much risk for the Conservative party, so we think they fall in line at the end.

Elsewhere the announcement that the ECB has finally come to the end of its QE program went largely unnoticed, but really deserved a bit more attention. It is incredible that a decade after the financial crisis only now are the extraordinary emergency policies put in place to fend off total collapse being withdrawn. While the crisis itself has faded in memory, the effects are still being felt everywhere, from the riots in France to Brexit.

Japan’s GDP numbers published last week made for grim reading. The revised annualised growth rate showed the economy contracting by 2.5 per cent in the third quarter. The nation has been unfortunate to suffer from a powerful typhoon, heavy flooding and an earthquake in Hokkaido over the last few months and with the economy geared towards export and tourism, growth was expected to dip. Even so, the contraction was sharper than predicted. Unusually, the Yen was little affected by the news as the currency is considered by investors to be a “safe haven” from trade war volatility.

Meanwhile, in a bid to continue to insulate itself from the fallout of the ongoing trade war, Japan has struck a new trade deal with the EU. The deal will see the nation scrap tariffs on around a €1bn of goods such as wine, cheese and meat. In return the EU will remove duties on Japanese cars.

After months of speculation it has been confirmed that the European Central Bank will end its quantitative easing programme this year. The ECB had been hinting heavily that the programme would end after reducing monthly purchasing from €30bn to €15bn last summer.

However, sluggish regional growth and contractions in key economies for Q3 put pressure on the Bank to rethink its planned end date. ECB chairman Mario Draghi also confirmed the downward revision of Eurozone growth next year from 1.8 per cent to 1.7 per cent citing uncertainties due to geopolitical factors, market volatility and protectionist threats as the reasons for the change.

Elsewhere in the Eurozone, Italy has begrudgingly amended part of its budget plan in order to bring an end to its standoff with the EU. The country would have liked to have increased spending to kickstart its stagnant economy whereas the EU preferred if they could cut back on mounting debt. Italy has proposed to cut its budget deficit for 2019 to 2.04 per cent from 2.4 per cent in earlier drafts.

House prices grew at their slowest rate in almost six years. November growth was 0.3 per cent, in comparison, the October figures were at 1.5 per cent. Most of the blame has been attributed to Brexit as buyers and sellers wait to see how it plays out.

To compound further misery, the last quarterly figures (Sep-Nov) showed house prices falling by 1.1 per cent in comparison to the prior quarter, this has been the biggest quarterly drop in house prices so far this year.

The UK posted sluggish growth in the latest set of quarterly figures. GDP grew by 0.4 per cent in the rolling three months to October. Growth was supported by the resilient performance of the services sector, specifically the accounting and computer programming components of the industry. Manufacturing was flat through the quarter with falling car sales detracting from growth.
Author: FE Analytics
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Last week we returned to two old favourites, Brexit and Trump. The Brexit deal is currently being debated in parliament, with a final vote on whether to take it scheduled for tomorrow. It has been a blood bath. On the opening day the government suffered three defeats and has almost surrendered control entirely. This pantomime of national humiliation shows no signs of ending either.

The deal is almost certainly going to be voted down and what happens next is unknown, but very likely includes some sort of delay or extension while we try to sort ourselves out. There are many predicting Theresa May will resign, but we’re not so sure. If defeat and failure were all it takes, she’d be gone already.

Elsewhere Donald Trump completely exploded his own tweets about progress on a trade deal with China by simultaneously trying to arrest the most powerful woman in China and declaring himself the “Tariff Man” in renewed threats to escalate the trade war. An already jittery market collectively lost it and would have fared much worse had markets not closed for the funeral of President Bush.

Global: Stock Markets Slump as Yield Curve Inverts
A perfect storm of President Trump’s tweets and yield curve inversion helped spark a rout in US markets last week. Unsurprisingly the selloff spilled over to the European and Asian markets with DAX and the MSCI Asia Ex Japan down 1.1 per cent and 1.3per cent respectively earlier in the week. A yield curve inversion happens when the return on short term bonds rise above the longer dated one, it is generally considered an indicator of an impending economic slowdown. The spread between the three-year and five-year US treasury bonds turned negative earlier last week.

President Trump met Chinese Premier Xi last week and promptly announced a truce between the two nations. He also declared that China has agreed to reduce tariffs on cars coming into China from the US. China has yet to confirm on the claim. Subsequent tweets from the president threating further tariff hikes if a deal isn’t agreed did little to boost investor sentiment. The recent arrest of the Huawei CFO in Canada, requested by the US, over a possible violation of sanctions against Iran leads to further concern that the 90-day truce won’t be upheld.

EM: Credit Rating Agencies Downgrade Sri Lanka
S&P and Fitch downgraded Sri Lanka’s sovereign rating last week citing an uncertain policy outlook and refinancing risks as the reason for the downgrade from B+ to B. The country is effectively without leadership after the Prime Minister and cabinet were temporarily barred from official duties. Prime Minister Rajapaksa lost two no-confidence votes last month but continues to refuse to leave office.

Elsewhere, South Africa managed to climb out of its technical recession. The economy grew at an annualised rate of 2.2 per cent in the three months leading up to September.

However, the recovery could be short lived once the next quarterly set of results are published. State-owned energy company Eskom is struggling with rising maintenance costs and coal shortages. As a last resort, the company has been conducting daily rotational load shedding (planned blackouts). If at any point demand exceeds the supply, there is a real worry that the rolling blackouts could become permanent.

Oil: Qatar set to end long term OPEC Relationship
Ahead of the latest OPEC meeting Qatar have announced that they will leave the organisation next month. The country will instead look to prioritise increasing its liquified natural gas exports from 77 to 110 million tons per year. Qatar is one of the largest exporters of LNG worldwide but a relative minnow in crude oil production in comparison to other members: it contributes less than two per cent of total OPEC oil output. Its departure however is very symbolic as the nation will become the first Middle Eastern country to leave the cartel.

Oil prices have continued to slide, just dipping below the $60 mark earlier last week. This can be partly attributed to the uncertainty surrounding the outcome of the upcoming meeting between OPEC members. While its widely expected that supply cuts are to be announced, to what extent remains unclear. Saudi Arabia, one of the founding members of the cartel is under pressure from the US to not apply any cuts. The nation needs the backing of the US after the apparent state sanctioned murder of journalist Khashoggi.
Author: FE Analytics
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The End of Volatility?
Last week the most notable headline came from Jerome Powell, the Chair of the US Federal Reserve, when he announced that he thought interest rates were “just below neutral”. This apparent softening of stance has done wonders to soothe a jittery market, with US stocks rallying on the news. Whether or not this is materially any different from previous statements and actually signals any change in policy is debatable, but it is definitely what the market needed to hear. This might be the reassurance needed to put an end to the current period of volatility.

Elsewhere an awful lot of attention was paid to a range of “No-Deal Brexit” forecasts, from both the Bank of England and the Treasury. While they caused no end of comment, the information wasn’t new. Crashing out of the EU without any sort of contingency will be bad. Exactly how bad is up for debate, but the Treasury forecast is in that ball park. The Bank of England ruffled a few more feathers with its bleak worst-case scenario, but the worst-case scenario for anything is usually pretty bleak, it’s rather the point of the exercise.

UK: Banks Ready to Weather No-Deal Brexit Storm
UK banks are well-prepared to face a no-deal Brexit, said the Bank of England on Wednesday. Results of the central bank’s second stress test since 2008 revealed that the seven biggest lenders in the UK – HSBC, Barclays, Lloyds, Nationwide, RBS, Standard Chartered and Santander – would all be able to continue lending in the event of a no deal Brexit and still have enough capital to cover fines and compensation for wrongdoing. Of the seven, Nationwide and Santander were the best performers, while Barclays and Lloyds came out at the bottom, but the BoE maintained that “no bank needs to strengthen its capital position as a result of the stress test”.

Contrarily, the central bank noted that if the UK was to crash out of the European Union without a deal, it could trigger a recession worse than that seen in the financial crisis of 2008. The worst-case scenario would see GDP fall by more than 10 per cent over the next five years and house prices drop by 30 per cent.

US: ‘Real’ Interest Rates Almost Neutral
‘Real’ interest rates in the US are almost at a neutral level – where growth neither speeds up nor slows down – according to Jerome Powell. The statement from the Chairman of the Federal Reserve on Wednesday was well-received in equity markets on the belief that the rate-hiking course the US has been embarking on may start to slow down. In the bond market, the US 2-Year Treasury yield fell 2 basis points, while the US 10-Year Treasury hardly moved. The Fed, however, gave no indication as to whether they would curtail their rate increases, only that they would be monitoring the economic and financial indicators very closely.

Powell, who has come under fire from President Trump for his rate hiking, also took the opportunity to defend the continued increases. The Fed Chairman said that interest rates, currently 2.25%, are still low by historical standards. He added that the Fed’s expectations for the US economy were in line with many private sector economists and forecasted continued growth of the economy, low unemployment and an inflation figure not far off 2 per cent.

Global: Trump Furious After GM Announce Cuts
A ceasefire in the ongoing trade war between the US and China doesn’t look likely ahead of the G20 summit in Argentina on Friday where President Trump and President Xi are set to meet. Larry Kudlow, Trump’s chief economic adviser, said that further tariffs were likely if China didn’t bring any new ideas to the table.

The US President also seems to be starting fights at home, as the US’s biggest carmaker General Motors announced it would be shutting 7 of its factories worldwide and slashing thousands of jobs in an attempt to save $6bn. The carmaker cited preparing for the effects of an economic downturn and trade wars as the reasons for doing so and its share price rose 5 per cent off the back of the announcement. With four of the plants set to close in the US, the move goes against Trump’s desire to rejuvenate the manufacturing industry and after the news broke, the President voiced his opposition to the closures and threatened to remove all subsidies to the carmaker.
Author: FE Analytics
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Prime Minister May set to finalise Brexit Plans
This week the Brexit saga rolled on. After the high drama of last week when everyone was arguing over when, not if, Theresa May would be replaced; we find ourselves now with the same Prime Minister, same deal and the same sense of inevitability. While the political media still speculate over
parliamentary vote tallies and back room plots, it turns out May is a far cannier operator than many give her credit for. She appeared to recognise that the hard line Brexiteers in her own party were all bluster and is now betting that the voting public will accept any deal that means they don’t have to hear the word Brexit again, which we think should get very short odds.

Elsewhere there was another European anti-climax, as the Italian government looks to have conceded to EU demands and decided to take another look at its budget plans. As seems sensible, all the major protagonists of the last few months have opted for a quiet Christmas and decided to put the theatrics aside to get their affairs in order. It is unlikely to last through January, but a welcome early present none the less.

Manufacturing: Nissan Boss Under Arrest and Stripped of Role
The chairman of Nissan and CEO of Renault, Carlos Ghosn, was arrested this week on allegations of deliberately understating his salary and the personal misuse of company (Nissan) funds to buy luxury properties across the world. Shares in Renault tanked 8.4 per cent while Nissan’s shares are at risk of supervision by the Tokyo stock exchange.

Nissan and Renault’s almost two-decade long alliance has become increasingly lopsided over the last few years. Renault has a 43 per cent stake in Nissan whereas Nissan only holds 15 per cent in Renault even though Nissan contributes more in profit. Nissan also bought a 34 per cent stake in Mitsubishi in 2016 creating a three-way alliance.

Ghosn has been instrumental in keeping the alliance together. There were hopes that a merger between Renault and Nissan would create a stable group to compete with the likes of Toyota and Volkswagen but with Ghosn now stripped of the chairman role in Nissan, those dreams look to be firmly shelved.

Commodities: Oil Prices on the Slide
In the months before October oil prices were on the rise as markets worried about the impact of the US placing sanctions on Iran and stepping up its beef with China. A few weeks later however and the oil price is now tumbling due to an oversupply issue.

The oil price has been on downward streak for the last six weeks touching $62.50. One of the reasons for the oversupply is the US granting eight temporary waivers to the larger importers of Iranian oil, blunting the impact of sanctions. Another reason was Saudi Arabia’s record increase in daily oil production this month.

The country typically plans its production level about four to five weeks in advance as customers submit their orders. It ramped up supply to meet an expected shortfall that has subsequently failed to materialise. It is estimated the nation needs oil to be above $70 a barrel in order to balance its budget, so these output levels are unlikely to last.

Asia: Singapore Posts Sluggish Quarterly Growth Figures
Singapore’s economy reported sluggish year-on-year growth of 2.2 per cent in Q3 which represents a slower pace of growth from the 4.1 per cent increase in the previous quarter. This slowdown was mainly driven by a weakening manufacturing sector. Manufacturing growth was 3.5 per cent in Q3 down from 10.7 per cent in the previous quarter. Rising tensions from the trade war is also expected to impact the growth rate in 2019.

It wasn’t all doom and gloom for the country, growth in the transportation and storage as well as the accommodation & food services sector picked up at a quicker pace at 2.1 per cent and 4.1 per cent respectively.

Elsewhere in Asia, Japan’s consumer prices, excluding fresh food, rose one per cent in October from a year earlier woefully short of the BoJ’s two per cent inflation target. With the prospect of lowered mobile phone charges for users and falling energy levels, reaching this inflation target is proving to be tricky for the country.
Author: FE Analytics
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Brexit Debate Intensifies
This week the inevitable clash between Brexiteers and reality came to pass as Theresa May finally unveiled the Brexit deal. The basic facts are that hard Brexit is too economically destructive to be a genuine option, while any compromises to minimise that harm will leave us subject to EU rules without having a say on them. As was always the case there is no middle ground. Where we go from here is unclear, although we suspect most MPs will conclude a bad deal is better than no deal after all.

While objectively it is a bad deal, a half in – half out Brexit, in many ways it much better than we expected it would be. Some access to the single market is retained; while freedom of movement, budget contributions and shared fishing rights are all over. That negotiators managed to win concessions on European Court of Justice’s oversight is genuinely impressive. This deal will have delivered most of what was campaigned for, but it remains to be seen if this pragmatism can win out.

US: FDA Seeks to Curb Underage Vaping
Alarm bells were ringing this week for US E-cigarette companies as the FDA gears up to announce a ban on youth-friendly flavour pods predominately produced by Juul Inc. Juul Inc whose sleek product design, fruity pods and active social media presence quickly grew to become very popular with the younger demographic. The company has gone on to capture 71 per cent of E-cigarette market share since launching in 2017.
The FDA was caught by surprise with surging uptake this year and gave E-cigarette companies six weeks to submit plans on how they would keep menthol products away from minors.

The deadline for this passed last weekend. The news that FDA is also mulling a move to restrict menthol in traditional cigarettes sent some of the tobacco companies share prices in retreat. Around 20 per cent of Altrium’s (the maker of Marlboro) profits were due to the sale of menthol cigarettes. Shares in both companies fell 3.5 and 10.6 per cent respectively earlier in the week.

Eurozone: German Economy Contracts
The German economy contracted for the first time in over three years throwing another spanner in the works for the ECB. The Central Bank is expected to announce the end of quantitative easing in the Eurozone in a few weeks even though the region posted sluggish growth last quarter. Germany blamed GDP shrinking by 0.2 per cent between the second and third quarter on a fall in exports.

While a slowdown in growth was anticipated, as German car manufacturers scrambled to comply with the new emissions standard, the contraction was sharper than expected indicating that the country is also feeling the squeeze from the trade war between the US and China.
In slightly more upbeat news for Germany, the US has delayed a decision on applying tariffs on foreign cars. Mexico and Canada would be exempt from tariffs having joined the revamped NAFTA agreement, but it would leave the likes of Germany, Japan and the UK as the main targets for the possible tariffs.

Global: Samsung’s Biotech Arm suspended from Trading
South Korea’s Securities and Futures Commission suspended trading of Samsung BioLogics this week and fined the world’s third largest contract drugmaker $7.05m. The regulator ruled that it had committed accounting fraud in 2015 to inflate its value ahead of an initial public offering in 2016. The watchdog also asked the Korean Exchange, to look into whether Samsung BioLogics should be delisted. A delisting would be a massive blow to the Samsung group, which has gambled on the biotech company as a future growth engine to reduce its reliance on the smartphone and semiconductor businesses.

Elsewhere, it was a miserable week for Apple’s suppliers. The company suffered from poor unit sales last quarter and in turn, a number of suppliers cut their earnings forecast. Japan Display slashed its full year guidance due to “volatile customer demand” and US based Lumentum Holdings who provide 3d sensing technology also issued a sales warning, citing that it was asked by one of its largest customers to reduce shipments.
Author: FE Analytics
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The US Midterms this week saw the Democrats wrestle back control of the House of Representatives after eight years, while the Republicans maintained
control of the Senate leaving the country politically gridlocked. The elections weren’t without their fair share of controversy. Voting machines appeared
to break down in predominately black areas of the county of Georgia leaving voters unable to vote for African-American candidate Stacey Abrams with
incumbent governor Kemp winning the county. In Ohio, claims of vote rigging turned out to be caused by a temporary paper jam.

The US market generally reacted positively to the news as the result went according to expectations. There is also hope that the Democrats will be
willing to delay the implementation of further tax reforms or fiscal stimulus by President Trump potentially cooling the need for further rate hikes. A
softening dollar also provided refreshing news for emerging countries laden with US dollar debt.

Global: Earnings Season Winds Down
The average earnings for S&P 500 members exceeded expectations last quarter with the final figures expected to be around 26 per cent. However, the positive news was tempered by the fact that most the companies provided cautious growth outlooks for next year, as the effects of rising costs and trade tensions start to be factored in.

One country already feeling the trade war squeeze is Japan. Half of the Japanese companies within the Topix Index fell short of expected profit forecasts last quarter.

Elsewhere, UK retails reports were gloomy. Only 26 per cent of retailers surveyed reported that sales in October were higher than those of a year ago. Rising competition and the increasing threat from online retailers such as Amazon was the main reason for the downbeat reports.

However, Sainsbury managed to produce a positive report this week driven by a hot summer and sharing some of its retail space with Argos. The company continues to wait for the approval of the merger with Asda.

UK: Service Sector Growth Hits a Seven-Month Low
The UK service sector growth dropped to a seven-month low after a strong summer period. The IHS Markit services purchasing managers index fell to 52.5 in October.

The survey is being used to illustrate how Brexit negotiations are affecting Britain’s economy. The industry accounts for 80 per cent of the British economy. Meanwhile, data published by Halifax this week highlighted that annual rate of house price growth fell from 2.5 per cent in September to 1.5 per cent in October. This is the lowest rate of annual growth since March 2013. Economic uncertainty and interest rate rises held back activity as mortgage approvals dropped off slightly. Monthly home sales also remained flat in the three months to September.

Overall, GDP grew by 0.6 per cent in the three months to September expanding at the fastest pace in two years.

EM: Emerging Countries Abandon Dollar Currency in Debt Sales
The divergence between the US and European interest rates has led to many emerging markets switching the currency in which their debt is sold. The Fed is expected to continue tightening borrowing costs while the European Central Bank is expected to remain dovish. As a result, in the six-months to October emerging nations sold $277bn of non-dollar denominated debt. In comparison, they sold only $24bn of dollar denominated debt
within the same period.

To illustrate the trend, Kazakhstan has given up its dollar addiction for the first time; abandoning the currency to instead sell €1.05 billion of bonds this week, with UK buyers acquiring the lion’s share of the debt sold. The country was also told off this week by the International Monetary Fund, for overburdening the central bank with tasks such as bailing out banks, being part of long-term financing of the economy and subsidising the nations mortgage programme.
Author: FE Analytics
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Last week the market looks to have finally settled down, after prematurely declaring the same thing the week before. While the volatility may have diminished in the background, uncertainty hasn’t. A story that Theresa May had secured access to the single market for services was quickly rebutted, likewise a tweet from Donald Trump that he was close to a trade deal with China.

Elsewhere, elections in Brazil and Germany have the potential to dramatically shape their respective nations. Right wing firebrand Jair Bolsonaro won the Brazilian presidential election and while the market reacted favourably, if myopically, to his economic policy; he’s a divisive figure who may yet bring more instability to the country. In Germany, poor local election results have persuaded Angel Merkel to not seek re-election as chancellor in 2021, leaving a power vacuum in both Germany and Europe at a crucial moment.

Eurozone: EU Posts Sluggish Growth
Slower than expected economic expansion in France, growth stalling in Italy and a surprise slowdown in gross domestic product in Germany all contributed to the Eurozone GDP growth missing expectations for the third quarter by 0.2 per cent.

Germany’s sluggish growth was linked to car manufacturers struggling to adjust to new emissions testing. This lead to the number of new car registrations falling by 30 per cent for the month of September. Meanwhile, the annual inflation rate rose to a ten-year high to 2.5 per cent for October driven by the high oil prices. The Eurozone region also saw inflation rise due to same factor.

Rising inflation for the region poses an interesting conundrum for the European Central Bank. While it helps to justify phasing out bond buying as quantitative easing is no longer needed to stimulate the economy, it comes against a backdrop of widespread economic slowdown for the region. Read our full breakdown of the budget here.

UK: Budget Claims to End Austerity
When the latest UK budget was released Chancellor Phillip Hammond pledged an end to austerity although this wasn’t quite as generous as it seemed. It mostly consisted of not making further large cuts to public spending, with most government departments not getting much in the way of extra cash. The £15bn reserve to help manage a hard Brexit is reassuring, but unlikely to be enough.

Other highlights included raising personal allowance from £11,850 to £12,000 and the higher rate threshold lifted to £50,000 from £46,351. The change would see high earners potentially save £860 a year.

However, what was wasn’t mentioned in the Budget Red Book was the national insurance changes which would wipe £340 off those savings. This is because the threshold at which the NI drops from 12 per cent to two percent also rose to £50,000.

Trade: Trans-Pacific Deal revived after Australia Joins
The Trans-Pacific partnership is set to go ahead after Australia ratified the trade pact. The partnership between the 11 nations will come into effect on the 30th December 2018 even though five of the nations have yet to join. Between them, the nations have close to 14 per cent of the worlds GDP. It would have been higher but for President Trump pulling the plug on the US joining the agreement early last year.

The deal eliminates all tariffs between the member nations. This helps countries such as Australia and Canada to export agricultural produce to Japan but leaves the US farmers in a predicament. The pact also requires countries such as Taiwan to reform and move away from protectionist policies before they can join the agreement.

China is also looking to dilute its dependence on exports to the US. The Regional Comprehensive Economic Partnership which includes the likes of China, India and Australia has also gathered momentum and could be completed as early as November.
Author: FE Analytics
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This week markets appeared to stabilise, albeit in an unstable fashion, with a mix of up days and down days. It’s probably too soon to declare the dust settled, negative reports from Amazon and Google has triggered a further wave of selling, but there might be light at the end of the tunnel. Right now, most equity markets are down about 8 per cent from a month ago; with Europe down a bit more based on the shenanigans in Italy. As corrections go this feels about right, although we might see Asian markets fall a bit more before we truly bottom out.

Elsewhere the UK remains braced for the budget, which is due to be delivered next week. Philip Hammond is in a difficult position, he needs to maintain a war chest in case Brexit is worse than the forecast while simultaneously finding the money to deliver on Theresa May’s spending pledges. Investors have been easy targets for previous cash strapped Chancellors, we wait with trepidation for Monday’s announcement.

Commodities: Gold Continues Extended Rally as Oil Prices Cool Down
Gold continued its extended rally this month and rose by three per cent as investors left volatile global markets to park their assets into the re-emerging “safe-haven”. Mining Companies such as Fresnillo and Randgold rallied, registering gains of 9.1 and 3.8 per cent respectively. The metal also benefitted from rising inflation and a stronger dollar.

While gold has been a beneficiary from poorer economic conditions, oil prices have cooled down as spending tightens. In addition, the Saudi authorities confirmed that they will look to ramp up production to 11 million barrels a day. The move was made in order to help offset the loss of Iran’s oil supply when the sanctions come into effect next week. However, there may yet be sanctions applied to Saudi Arabia due to the murder of journalist Jamal Khashoggi. How much oil is actually required to fully cover the loss of Iran’s supply by OPEC members remains unclear.

Eurozone: Italy's Standoff with the European Commission Accelerates
Italy continues to dominate the headlines this month. The week the country saw its budget thrown out by the European commission and was given a three-week window to submit a new plan. The reason for the rejection was that the country’s budget plan deviated substantially from the recommendations to improve debt to GDP levels by 0.6 per cent.

Instead, Italy plans to increase public spending in order to kickstart an economy which has undergone a long period of stagnation. The spread between the German and Italian 10-year government bond yields, used by investors as an indicator of political tension, widened by seven basis points after the announcement.

The pressure continues to build on the country’s banks who have substantial holdings in Italian government bonds.

US: Quarterly Earnings Announcements Produces Mixed Results
With earnings season in full swing, this week saw Microsoft and Twitter produce positive results. Amazon announced a record three-month profit of $2.9 billion but still managed to disappoint investors as quarterly net sales fell below analyst expectations.

It was a similar story for Alphabet, who after a period of strong revenue growth slowed down with the latest figure just shy of the consensus. Google also become embroiled in a sexual misconduct scandal. Reports surfaced that 48 people were sacked over the last two years of which, 13 were senior members of staff.

Elsewhere, earnings reports for US industrials companies also highlighted plans to pass on rising costs caused by labour shortages and increased tariffs to consumers.
Author: FE Analytics