Market Updates

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In what is fast becoming a real-life soap opera, this week’s episode of Brexit saw the narrative pick up the pace. John Bercrow kicked things off by
quelling Theresa May’s “if it doesn’t work try try again” approach of pushing the same deal through only to get continuously rejected by parliament.
Theresa May then managed to rile up Parliament blaming MP’s for the mess and attempting to win over the public. With three million people signing
the petition to repeal Article 50 and a march planned this Saturday in London, it appears that she has lost both sides of the dressing room.
May then pushed the EU for a short extension to allow her deal through. After a marathon of session talks, the EU handed May another grace period to
come up with an alternative Brexit plan. This could mean Britain will remain an EU member until 22nd May provided the MP’s approve the revised deal,
otherwise a much shorter extension will be offered which lasts until 12th April. While the Prime Minister has been granted breathing space, the control
she had upon proceedings has taken a big hit.

To the surprise of absolutely no one this week, the Federal reserve stuck by its cautious approach leaving interest rates unchanged again this year. While the US economy remains resilient, risks caused by trade tensions, Brexit and slowing global growth have led to officials slashing their projected rate hikes from two to zero this year. Bond yields which were volatile in the run up to the meeting fell post announcement while equities which favour low interest rate environments performed well. A softening dollar also benefits EM currencies with the likes of South African rand and Indian rupee up 1.73 and 0.2 per cent against the dollar.

What is more interesting to hear are the finer details on how the Fed plans to slow down its balance sheet runoff. In May, the Fed will look to lower the cap on monthly redemptions of treasury securities by half from its current $30bn level. It will then look to halt the runoff completely by end of September.

Worldpay changed owners for the fourth time in a decade this week following a takeover by US firm Fidelity National Information Services (FIS) for £32bn. Worldpay handles more than 40 billion transactions a year, within the UK alone, it accounts for 42 per cent of all card payments. FIS on the other hand only cater to financial services firms, so this acquisition is a diversification play for the company. Shares of Worldpay closed up by 9.31 per cent following the announcement.

By 2024, global digital payments is set to reach $7.6tn. As a result, the fintech sector, which predominately consists of payment processing companies has been scaling up to meet demand. Mergers and Acquisition activity within this space has been accelerating. In the first half of 2018, 141 transactions happened at a total value of around $46bn. In comparison, the full-year figure for 2017 was $32.9bn.

The national statistics office published its latest UK jobs data which appears to defy gloomy Brexit news. The unemployment rate now stands at 3.9 per cent in the three-month period to January – its lowest rate in over 44 years. However, it must be stressed that these figures are backward looking and stops before the first of Theresa May’s parliamentary defeats. Thus, the next set of unemployment data will be more indicative of how the rate has affected to heightened risk.

Meanwhile, the Scottish economy outpaced the UK as a whole in Q4 last year. GDP expanded by 0.3 per cent in comparison to 0.2 per cent. Growth was predominately fuelled by the construction and services sectors. Comparing last quarter with the same period in 2017, GDP grew by 1.3 per cent equivalent to UK growth.
Author: FE Analytics
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Will the EU Agree to a Longer Extension?
This week we have to turn our attention yet again to Brexit. After a series of votes and high political drama it came as a surprise to no one that we find
ourselves in exactly the same position as before. Theresa May has been told again that her deal is the worst of both worlds, simultaneously too hard and
too soft, yet is pressing ahead regardless and looks set to put it to yet another vote next week. Meanwhile the headline development of taking “No-Deal”
off the table is also meaningless. While No-Deal is now no longer the official policy of the government, it’s still going to happen unless parliament can
agree to something else.

Markets are treating the news as positive, but will probably face up to reality sometime next week when we start the rigmarole all over again. Even the
motion to delay Brexit can’t be taken at face value, as a short extension solves nothing. A long extension may be all that’s on offer, but don’t rule out one
of the 27 other countries causing an upset. Right now all outcomes, even those that have been ruled out, are equally likely.

Commodities: Trump Renews Attack on OPEC
Late last year OPEC members gathered to discuss how to halt falling oil prices caused by expected Iranian sanctions failing to materialise. At the time Saudi Arabia and Russia stepped in to boost production and, combined with a glut of US shale oil and the extension of waivers to countries importing Iranian oil led to an oversupply. The cartel agreed then to reduce oil production by 1.2 million barrels per day; a few months later, oil price has reached a year high of $67.6 dollars, much to the annoyance of the President.

Meanwhile this week, the world’s largest sovereign wealth fund (Norway) announced its plans to disinvest from oil and gas companies to the tune of £5.7bn. This move will heavily impact upstream oil and gas companies who focus on exploration. Growing domestic climate change concerns have influenced the move although it appears decreasing its oil exposure will help reduce its risk to steep energy price falls as witnessed in 2015 when oil price dropped close to 40 per cent for the year.

Companies: Boeing 737 Planes Grounded Following Latest Crash
Following a tragic plane crash this week in Ethiopia which killed all 157 passengers on board, dozens of nations including the US have moved to ground Boeings’ 737 Max aircrafts. This is not the first time this has happened, only five months ago a 737 Max aircraft crashed killing 189 people. Unsurprisingly, Boeing’s stock has plummeted by close to
12 per cent this week so far. Investigations continue to determine if there was any link between both crashes caused by faulty design.

Elsewhere Adidas, a stock beloved by European fund managers warned that supply constraints would cause it to miss sales growth targets for 2019. By being unable to keep up with demand for mid-priced shoes in North America, it is likely to result in a loss of sales between €200-
400m. Most of the impact is set to occur in the first half of the year with sales expected to pick up thereafter.

Eurozone: Industrial Output Picks up for the Bloc
In the latest sign that the global economic slowdown is starting to hurt Germany’s manufacturing, industrial output for the month of January fell by 0.8 per cent. The country which narrowly managed to avoid a technical recession last quarter blamed the loss on strikes and a switch to new brands for the decline. German carmakers are having to contend with a decline in car sales in China and tougher new diesel emission laws. Headwinds from abroad are impacting Germany as seasonally adjusted exports were flat for month-on-month January.

However, the wider eurozone’s figures made for much better reading. Industrial production rose 1.4 per cent from the previous month of January exceeding market expectations. Energy managed to reverse its decline of 0.6 per cent increasing by 2.4 per cent. Overall, it appears that the bloc has managed to climb out of its industrial technical recession, but it is far too early to say if the positive momentum will continue.
Author: FE Analytics
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Last week we received further evidence of the US-China trade war taking a toll, with data showing Chinese exports reportedly dropping 21% year on year. While some of this is down to a slowing global economy, the falling out with Donald Trump isn’t helping. This comes alongside data showing that Russia has massively increased its global share of soybean exports, largely at the expense of US farmers who have been targeted by retaliatory Chinese sanctions. With the extent of the mutual harm the dispute is causing now more evident, it is unsurprising that both sides seem keener on reaching a deal.

Elsewhere; the Financial Stability Board, a global regulator, has started to look closely at the leveraged loan market. As the sector has expanded massively after a decade of low interest rates, there is a concern that the risks the asset class poses to the global markets might have been overlooked. While its likely a lack of supervision has encouraged bad behaviour, at least it’s being looked at now rather than after something has imploded.

Over a decade ago, a combination of the Great Recession and underreported government debt levels led to a crisis in confidence for Greek sovereign bonds. This ultimately resulted in them being shunned from the international debt market. Instead Greece turned to the IMF, ECB and Eurogroup for funding. Since then the country exited its third bailout programme in August 2018.

An almost stable economy and somewhat better political system prompted ratings agency Moody’s to notch up its rating from B3 to B1 making Greece once again an attractive proposition to foreign investors. Last week saw the country raise its first 10-year bond in nine years managing to raise €2.5bn priced at 3.9 per cent yield. The sale drew offers worth €11bn euros.

Global growth slowing has prompted central banks to follow a dovish path holding off on rate hikes, which ultimately helped make longer dated bonds more attractive to the market. Italian, Spanish and French sovereign bonds have all benefiting from strong demand.

Reports emerging of Amazon plans to launch dozens of grocery stores across the US sent retails stocks into retreat. The worst performer was Kroger falling by 4.47 per cent: which also unfortunately coincided with poor earnings results deepening its woes. Amazon’s physical stores are nothing new, the company has been operating a series of pop up kiosk stores since 2014 and last year tapped into the grocery market buying Whole Foods for $13.7bn. However, what is becoming more apparent is a strategy shift towards brick and mortar stores. Cashier-less stores would both complement online retail (require prime membership) while competing with grocery giants like Walmart and Kroger.

Last week PMI reports were published providing an opportune moment to revisit the health of the US economy. Non-manufacturing sector and business activity ticked up exceeding expectations. Both new orders and exports improving from January’s dip as government shutdown worries eased in February.

MSCI is set to increase the weighting of Chinese A shares in its global indexes starting this May. It will do so in a three-phase approach. The share of China A large-cap stocks will increase from a 5 per cent inclusion factor currently to a 10 per cent inclusion factor in May, then will look to be bumped up to 15 per cent in August and 20 per cent in November. Once the process has been implemented, China A shares will account for 3.3 per cent of the MSCI Emerging Markets Index.

Meanwhile Italy is planning on becoming the first G7 country to join China’s multi-trillion-dollar Belt and Road initiative. The “new silk road” project scope is vast and covers everything from Chinese investments in ports and roads to cultural exchanges and trade deals. So far around 80 countries have joined the initiative. Italy’s plans prompted a stern rebuke from the White House and alarm for the EU. The main fear is that by accepting large amounts of investments, recipients would be trapped by debt further enhancing China’s global influence.
Author: FE Analytics

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Theresa May to give MP's the chance to extend article 50
Last week we witnessed a major change in direction from both the government and opposition for their respective Brexit policies. Theresa May walked back yet another commitment and conceded that there should be an extension to article 50. This has been inevitable for some time as, quite apart from all the clowning about in parliament, there is actually a lot of legislation to be passed into law before leaving, regardless of the terms. We had already passed the point where that could have been accomplished so it was just a matter of when the Prime Minister would acknowledge that reality. While this move has garnered a lot of attention it hasn’t changed anything, there will still be nothing the parties agree on at the end of the period, except the option to delay will no longer be available.

Elsewhere the Labour leadership have backed a second referendum, but at the time of writing the exact policy was to put any deal agreed by parliament back to a vote. As there isn’t a deal parliament can agree on the stance is meaningless, much like the term Labour leadership.

Eurozone: Does Italy pose a threat to the EU?
Last week the European Commission (EC) warned that Italy is facing “economic imbalances” with government policies exacerbating the issue to the point that it poses a threat to other member states. Last year saw the commission and Italy at loggerheads over budget plans with the latter wanting to pump more money into a stagnating economy while the former would prefer the nation focusing on cutting rampant debt. Government debt now stands at €2.3tn easily dwarfing anything the Eurozone bailout fund could handle in the event of a crisis.

A compromise was made last Christmas to reduce the structural deficit from 2.4 to 2.0 per cent of GDP. However, it was based on growth forecasted at 1.2 per cent: this month the commission revised GDP down to 0.2 per cent for 2019. While Italian banks have made good headway in reducing the number of bad loans this year, maintaining this will be a challenge in a slowing economy. If an Italian selloff was to occur, France would be heavily impacted as its credit exposure is five times greater than the second biggest holder of Italian credit, Germany.

UK: Car Exports Slumps for eighth consecutive month
Tighter diesel emissions laws, Brexit, and a slowdown in Chinese demand all played a factor in UK car production dropping for the eighth consecutive month. January’s figures were particularly sharp with output bound for China plummeting by 72 per cent compared to last year. Exports to Europe, its core market, were also down 20 per cent.

Additionally, engine manufacturing, a UK focused part of the car manufacturing supply chain, was down 9.5 per cent. This is due to domestic orders falling as companies wait to see how the article 50 deadline plays out next month.

Elsewhere, results for the UK property market were subdued last week. House prices fell slightly by 0.1 per cent for the month of February and annual growth remained sluggish at 0.4 per cent. One rare positive is that home ownership increased by 1.1 per cent driven by those aged 35-44 years old. Having said that, the percentage of home ownership for that age bracket (57 per cent) is a long way off its peak before the great recession (73 per cent).

Commodities: Barrick Gold Launches Hostile Takeover Bid
Barrick Gold launched a hostile takeover bid last week offering $17.8bn to acquire Newmont mining corp. The offer would effectively create the world’s largest gold mining company. Newmont remain uninterested, stating the bid was driven by ego rather than logic. A merger was almost completed between the two in 2014 but the deal fell apart due to personality clashes between senior executives.

Gold prices have been on an upward trend since the October selloff last year as investors dumped riskier assets in favour of gold and other safe-havens. Similarly, mergers and acquisitions (M&A) have had an uptick as companies look to combine resources to deal with depleting gold production figures last quarter. Barrick kickstarted this by merging with Randgold late last year and Newmont last week has been given the greenlight to complete its own tie up with Goldcorp.

Author: FE Analytics
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Is the US’ Standoff with Huwaei Set to End?
This week President Trump appeared to make a major concession in his trade negotiations with China by significantly softening his stance on Huawei. Trump said the US shouldn’t ban “Technology” and urged US tech companies to compete or get left behind. This comes after weeks of the government labelling the firm as a risk to western countries and attempted to influence other nations to drop the company from future 5G networks. Trumps words strike a different tone to his administration however, who this week threatened to stop intelligence sharing with any country willing to work with the firm.

Elsewhere, Labour is in complete disarray after nine MP’s quit this week with the latest member Ian Austin blaming Corbyn for “creating a culture of extremism and intolerance”. Almost all have joined a newly created Independent Group which now stands as the fourth biggest bloc in parliament. Unrest has also spilled over to the Tories. In addition to Theresa May attempting to run down the clock to push through her deal, she now has to contend with further rebellion if it fails to get through the commons. Expect further turbulence over the coming weeks.

US: Fed Plans on ending quantitative tightening this year
Minutes from last month’s Federal Reserve meeting were published this week. The two key takeaways were a confirmation on the reversal of quantitative easing along with a split in consensus on the next move for interest rates. Since 2008, the central bank had been pumping money into the economy by purchasing mortgage backed securities and Treasuries up until 2017. It has since allowed its assets to shrink with investors growing increasingly alarmed at how quickly it was withdrawing its support, especially as political risk heightened towards the end of the year. A pause in “Quantitative Tightening” has been welcome news to markets.

What was harder for investors to discern was the future direction of interest rates. After a period of successive rate rises it was hoped discussions would turn to cuts, instead, some committee members solely focused on holding rates steady while some argued for hikes this year if inflation accelerated past its two percent target.

UK: Honda Shuts Plant Ahead of Brexit Deadline
News of Honda’s plant shutdown along with a potential credit downgrade provided yet more bad news for Brexit Britain. While Honda has been careful not to blame Brexit directly, the uncertainty won’t have helped at what is a very tough time for car manufacturers globally. With a loss of around 3,500 jobs the regional impact will be huge. Like Nissan, the company has decided to move production back to Japan following the completion of a trade deal with the EU. Expect Toyota to be considering the future of its Derbyshire plant for the same reasons.

Meanwhile, the UK has been put on Fitch’s negative watch list; a precursor for a potential downgrade to its AA credit rating. With six weeks to go the risk of a no-deal Brexit forced the ratings agency to make a deviation from its normal updates calendar. While the impact of a hard Brexit is uncertain, Fitch estimates no-deal will lead to a two per cent loss in GDP over six quarters – a recession on a scale of the one in the early 1990’s.

South Africa: Government Set to Bailout Energy Giant Eskom
Floundering state-owned utility Eskom is set to receive a hefty bailout package by the South African Government. Its balance sheet has ballooned over the last few years and total debt now stands at around £23bn; Eskom’s electricity sales are barely enough to service the interest on its debt. The government won’t fully cover its debt burden but will set aside £3.8bn from its budget over a three-year period. Eskom has been plagued by corruption, incompetent management and cost overruns on new plant developments, and as a result will also be restructured into three separate entities to shrink costs and attract new investment.

As a result of bailing out Eskom, South Africa’s budget deficit has widened to its worst level in over a decade. The nation is estimated to end up borrowing around £66m a day this year. Gross national debt is expected to stabilise at 60 per cent of GDP in 2023/24.
Author: FE Analytics
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UK Property Funds Switch Pricing to Stem Outflows
This week saw another property fund move to limit the impact of outflows as Janus Henderson announced it was moving its pricing to a full spread basis
in March. While this sounds like a minor bit of fund administration, and to an extent it is, the timing of the move is interesting. Following the referendum,
a sudden run on property funds caused a number to temporarily shut down as they struggled to meet investors demand for redemptions. With the
possibility of a hard Brexit looming, it is interesting to see funds take pre-emptive action to try and avoid the same situation.

Elsewhere; it is not entirely clear if we still have a government after parliament failed to pass a vote reconfirming what it had voted for two weeks ago.
While we still have all the same people claiming to be in the government, there doesn’t appear to be any possibility of them actually governing. With the
pro-Brexit camp now split as well, there is now only the option of delaying Article 50 that has any chance of passing parliament.

US: Reviewing last quarters earnings
Turbulent markets, Fed rate hikes and mounting trade tensions dominated headlines last quarter, so investors would be forgiven for not being overly optimistic as Q4 results started to trickle through last month. With over 70 per cent of listed S&P 500 companies having declared earnings so far, now would be a prudent time to look back at the data and see how the stock market held up amidst strong market noise last year.

Overall, results have been positive with all sectors bar financials, basic materials and utilities outperforming expectations. Oil and Gas ended up being head and shoulders above every other sector with six of the major oil companies posting $50bn in combined profits, buoyed by surging crude prices last year. The financial sector may have not met market expectations, but this was mainly driven by losses posted by asset managers like Invesco and Franklin Templeton. Basic materials ended up being the worst performer, however, company specific issues tend to skew the result.

Eurozone: EU Commission Widends Country Blacklist
A new transatlantic spat is brewing after the EU Commission decided to name and shame regions that pose a high risk of money-laundering. This list now extends to include four US territories and Saudi Arabia. What this means for financial companies within the EU is increased due diligence to identify suspicious money flows when dealing with customers from these regions. Unsurprisingly, this hasn’t gone down well over in the US with the White House calling the entire process “flawed”. France and the UK have also joined in with the criticism, mindful of the impact this list will cause in a time of heightened political risk.

While most European countries underwhelmed with their growth figures, Portugal continuous to perform well under the radar. GDP grew by 1.7 per cent last quarter due to a rise in private consumption and investment. However, the country isn’t immune from sluggish growth within the bloc and as a result exports have slowed.

Commodities: Turkey Opens Food Stalls to Combat Spiralling Prices
This week, President Erdogan deployed food stalls in Ankara and Istanbul to sell vegetables at a reduced rate in a bid to control rampant inflation. Food prices have been spiralling after last month’s flash floods in Antalya wiped out the region’s key greenhouse hub. Year-on-year food inflation for January now stands at 31 per cent up from 25 per cent the month prior. What is really driving this push by the government is the upcoming local elections next month; rolling out food stalls nationally will go a long way in stemming unrest caused by exorbitant prices.

Elsewhere in commodities, a host of investment banks are turning bullish on copper mainly driven by demand from China. The nation now accounts for over half the world’s electric car sales and production is set to rise by 53 per cent this year. An electric car requires three times as much copper as a conventional car. Analysts estimate copper will reach $6700 per tonne this year.
Author: FE Analytics
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Separating Noise from Reality
This week a lack of any major developments allowed us the time to look closer at some of the economic data of the last few weeks. It has reminded us that we ought to do this more often and ignore the headlines all together. Italy is currently in its third recession in a decade while Germany’s economy
shrank in the third quarter of 2018 and stagnated in the fourth quarter. While it will likely avoid an all-out recession, a global slowdown and retrenchment in world trade is taking its toll. Britain is also slowing down, with growth forecasts cut by 0.5%, although still at a comparatively healthy 1.2%.

Elsewhere the US remains resilient. Despite the longest shutdown in government history, the US economy added a staggering 312,000 jobs in December, exceeding expectations, and is still forecast to grow more than 2% despite the Fed applying the brakes last year. Contrast these numbers to the amount
of news coverage and market returns and you’d be forgiven for thinking they were from an alternative universe.

Eurozone: GE Fined for failing to deliver French Jobs
General Electric (GE) were hit with a hefty €50m fine by the French government this week for failing to create the 1000 new jobs it promised to deliver in 2015. GE took over Alstom’s energy division and part of the deal being given the green light
by the government was a job creation target which GE not only failed to do but completely abandoned – only 25 new jobs have been created over a three-year period. Alstom’s energy branch specialises in gas turbines, however as clean energy became more commercially viable,
job creation was always going to be an uphill struggle for GE to achieve.

Elsewhere, Wirecard, a company beloved by European fund managers are under investigation following allegations of compliance breaches. A senior executive at the German digital payments firm is alleged to have forged contracts for several transactions. Shares tanked by 25 per cent
after news first broke out on the FT. As these events took place in Wirecard’s Singaporean office, the case has been handed over to local authorities.

US: Google's Earnings Report Leaves Investors Unimpressed
The last of the FAANG stocks reported their quarterly earnings this week. Revenues for Google jumped up by 22 per cent last quarter driven by strong advertising results. However, what was harder for investors to stomach was capital expenditure
doubling to $25.5bn. Shares of Alphabet (Google’s parent company) fell 2.5 per cent after the announcement. Its cost-per-click (CPC) advertising model has continued to do phenomenally well but is beginning to suffer from users migrating to mobile devices. Increased spending was
due to the company’s push on cloud services with data centres and servers getting most of its capital expenditure.

A notable mention this week goes to former bond King Bill Gross who retired aged 74. Gross founded PIMCO in 1971 turning it into a well-known name within the bond industry with close to $2 trillion AUM. Gross was long regarded as a superstar investor managing Pimco’s Total
Return fund until his acrimonious departure to Janus Henderson in 2014. He will instead focus on managing his own personal wealth.

UK: Brexit Uncertainty brings growth to a standstill
Brexit uncertainty continues to hamper UK growth as business sit and wait for the outcome. IHS Markit/CIPS Services PMI fell by 1.1 last month to 50.1 hovering just above neutral. The services sector accounts for around 80 per cent of GDP and is a good indicator of growth momentum. If we were to combine this PMI with manufacturing and construction indices, the all-sector PMI fell from 51.5 in December to 50.3 in January, signalling the slowest pace of expansion since 2012. Following the news, Sterling fell below the $1.30

Although wage growth has remained resilient, growth stalling has prompted the Bank of England (BoE) to follow the more dovish path set by the Federal Reserve and maintain interest rates at 0.75 per cent. The BoE also slashed growth forecasts this year from 1.7 to 1.2 per cent, worse than the European Commission’s 1.3 per cent estimate.
Author: FE Analytics
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Commodities: Markets rally as Fed pauses Rate Hikes
This week the most impactful story came out of the US, when the Federal Reserve announced it was keeping interest rates steady. This is significant, because while official guidance is for three rate hikes in 2019, many believe the Fed is overly optimistic in its estimate of the strength of the US economy and needs to back off. The market was convinced this move was coming; now it’s arrived a significant risk of disappointment has been removed. The impact is yet to be determined, monetary policy takes about 18 months to have an impact on the real economy.

Elsewhere the Brexit saga rumbled on. While there were a number of developments in parliament, none of them really mean anything and we expect to be back here again in two weeks’ time. Fundamentally there is one basic choice to be made; leave Northern Ireland behind, or accept some sort of customs union. Without making this choice, no-deal is the default. We expect Theresa May to eventually push her deal through, but that ultimately just means this choice is delayed to the end of the transition period.

Commodities: Vale under scrutiny following second dam disaster
At the time of writing 99 people have died and a further 259 remain unaccounted for in what has been described as the worst labour disaster in Brazil’s history, after a dam holding back iron ore by-product collapsed in a Vale facility last Friday. Around £15bn was wiped off market cap and share price plunged 24.5 per cent following the news. To compound matters class action lawsuits are already starting to filter through, while Brazilian prosecutors have quickly moved to seize £2bn in assets to ensure Vale pays for damages caused.

This isn’t the first time the company has been hit with a disaster, four years ago a similar dam collapsed in Mariana, wiping out a village and killing 19 people. Vale has since grown to become the world’s fourth largest mining company with revenues of around $34bn (2017). In response to the crisis, Vale has cut production by ten per cent and a further ten dams will be temporarily shut down to prevent future collapses.

Eurozone: Italy falls into recession
Italy capped off an abysmal 2018 by falling into its first technical recession in five years. Political unrest, an ongoing standoff with the EU over increasing public spending and with spiralling borrowing costs all played a part in slowing the economy. Output in Q4 contracted by 0.2 per cent following a decline of 0.1 per cent in Q3. Cyclical stocks that are sensitive to economic swings like banks were affected, with Banco BPM and Poste Italiano the worst performing stocks falling by -3.6 per cent and -3.3 per cent respectively.

This heaps further pressure on a coalition government already fraying at the edges. Deputy Prime Minister Salvini is being urged by his party (League) to call an early election this year to split with anti-establishment party Five Star Movement. News of the recession also cranks up further pressure on the ECB. President Draghi had hoped to enter a period of expansion following the decision to end quantitative easing last year but forecasted Eurozone growth this quarter is expected to be sluggish. Draghi has admitted “risk to the downside has increased” signalling a cut in growth forecasts when policymakers next convene in March.

US: Federal Reserve Pivots to Risk Management over Rate Hikes
The Federal Reserve performed a U-turn this week deciding to hold rates steady – a stark contrast from last month’s bullish stance of not yielding to market pressure to pause hikes. This time, chairman Jerome Powell struck a dovish tone as “crosscurrents” caused by growth slowdown in China, ongoing Brexit noise, US-China trade tensions as well as the partial government shutdown led to the Fed adopting a wait and see approach, before deliberating on further increases this year. Global markets reacted positively with S&P 500, FTSE 100 and Hang Seng index all up by 2.34, 2.73 and 1.31 per cent respectively.

Another key factor that drove momentum was the Federal Open Market Committee acknowledging that it could slow its quantitative tightening (QT) programme which began at the end of 2017. This program aims to shrink the size of the FED’s balance sheet, removing some of the additional liquidity it pumped into the market after the financial crisis.
Author: FE Analytics
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When will the US Government Shutdown End?
This week the partial US government shutdown enters a new phase. Already the longest shutdown on record, this week will see a second missed pay check for the federal workers caught up in the standoff. While the US economy and stock markets have so far largely been unaffected, from this point on the effects are likely to be more severe. While many public employees could survive a month, many more will struggle to survive two. Disruption and civil unrest are a real possibility. In an odd asymmetry, congressional staffers are getting paid, while White House staff are not, due to being included in different funding packages. This might hint to which side will eventually cave.

Elsewhere the World Economic Forum kicked off in Davos this week. The format is beginning to look rather tired, billionaires flying in on private jets to discuss inequality and climate change feels rather ridiculous; with the leaders of the USA, China, UK and France among those cancelling their trips, it appears the worlds politicians are feeling the same way. Notable speeches from George Osborne and Tony Blair just add to the sense of irrelevance.

Global: IMF Once again downgrades growth forecasts
As some of the world’s most influential leaders gathered in Davos, the IMF published their latest GDP forecasts on the first day. World economic growth for 2019 is now expected to be 3.5 per cent, down from 3.7 per cent in October. The significance of the slight dip is that the organisation has now changed its stance from one of expected growth stabilisation to admitting global expansion has weakened. Continued uncertainty surrounding the Brexit outcome, the negative impact of tariff hikes and softer momentum from key countries like Germany were all factors to blame for the downgrade.

Markets were twitchy this week following news of China’s sluggish growth rate, so hearing the IMF’s darkened outlook quickly sent Asian stocks into retreat. The Hang Seng, Topix and Nikkei closed down 1.23, 0.88 and 0.77 per cent respectively after the announcement. Investors instead piled into gold, government stocks and the dollar. A scenario of further escalation of the trade war and a no-deal Brexit could lead to further downward revisions for growth.

Emerging Markets: Venezuala Descends into Political Turmoil
Over in Venezuela, two presidents are vying for control of the country. On one hand we have Juan Guaidó, a member of the Popular Will Party, on the other, current incumbent Nicolás Maduro, who has ruled Venezuela since 2013 and is refusing to step down following the disputed 2018 election. Guaidó has the approval of foreign governments such as the US, France, and Brazil as well as a significant portion of Venezuelans judging by the scale of anti-government protests. However, Maduro is backed by the military and has received support from the Turkish, Russian and Chinese governments, so Guaidó’s claims to power is only symbolic for the moment.

A key factor as to who ends up in power is whether the military continues to back Maduro. He has so far resisted strong pressure from the US to step down, throwing out their diplomats this week. The US is looking at sanctions to key sectors like oil in response. Venezuela at one point a decade ago was on par with Saudi Arabia in terms of oil production but has since fallen off the pace under the last two presidents.

Eurozone: Mastercard Punished with half a billion fine
It has been a busy week for various European regulators. First up was Mastercard, levied with a hefty fine by the EU commission to the tune of £504m after being found guilty of preventing retailers using cheaper alternative banking outside their country. This was done by charging an interchange fee on transactions between the customer’s credit card and the retailers bank, thus artificially raising costs of card payments for both consumer and retailer. Up until December 2015 this practice was unregulated allowing both Visa and Mastercard to set differing rates to member states.

Next up Google was hit with its second fine in less than a year, this time £44m by CNIL for breaching GDPR rules. The rules state that any user should be able to download all their personal information into clear machine-readable format, so it can be used by any company if the consumer wishes to change services, which Google failed to achieve. Complainant NOYB has also accused Amazon, Netflix and Apple of a similar breach in compliance.
Author: FE Analytics
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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