Market Updates

15/10/18
Global Selloff Relents after Rally
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Rising US treasury yields, falling US tech stock prices, and incessant tweeting by President Trump were all factors contributing to the global sell-off this week. President Trump’s tweet questioned the Fed’s tightening policy. It appears the news of the rate hikes took some time to be digested by bond investors with BlackRock’s debt ETF recording a record outflow of almost $2bn in a single day. The bond market contagion spread to the US Equity market with technology stocks bearing the brunt of the headwinds.

However, the rout appears to not be as strong as headlines make out. With earnings reports for tech companies pencilled in for the 25th October, it wouldn’t be a surprise to see share prices for tech stocks rally as investors become attracted by resilient earnings prices and strong cash flow statements. Overall, it appears that the age-old adage of exercising caution and investing for long term growth continues to the best route for investors.

EM: Brazil's Assets Rally as Investors Favour Jair Bolsonaro
Brazil’s general election was held last Sunday, with far-right leader, Jair Bolsonaro almost winning the first round outright, falling just short after obtaining 46 per cent of the vote. He is now set to runoff against Fernando Haddad, candidate for the Workers Party who had 29 per cent of the votes on October 28th. Bolsonaro plans to cut the deficit and privatise state companies. His plans have proved popular with investors and as a result the Ibovespa index rose to around six per cent after the announcement. The Brazilian real also continued to extend its rally this month.

In contrast, the positive news hasn’t spread to the wider emerging markets. The MSCI emerging markets index was down three per cent this week, the Taiwan Taiex and Hang Seng indexes were also down this week as investors remained risk averse due to the global rout happening. However, towards the end of the week it appears that the losses for each of the respective indexes were being clawed back.

Utilities: SSE and Innogy Merger Receives Final Approval
It has been confirmed this week that the big six is set to become five after SSE and Innogy SE’s merger received approval from the Competitions and Markets Authority. The merger will make the new provider the second largest energy company in the UK after Centrica. The reason for the approval was that the watchdog believed both companies weren’t close enough rivals to warrant any concerns. SSE is expected to demerge its 66 per cent stake to shareholders with Innogy SE holding the remaining 34 per cent once the deal is concluded. There was little movement in the SSE share price post announcement reaching a high of £11.37 before coming back down £11.24 towards the tail end of the week.

In addition, Ofgem’s yearly state of the market report also came out this week. Interestingly the number of energy suppliers increased to 73 up from 60 last year. The increased competition has also allowed for more consumer choice with 1.4 million people having leaving one of the big six energy providers between June 2017 and June 2018. As a result, the overall profit margin for the big six fell for the first time since 2014 from £1bn to £0.9bn for 2017.

Technology: Google Appeals against 4.3bn Euro Fine
Google has appealed against a 4.3bn euro fine handed out by the European commission. The company was determined by the commission to have breached its antitrust rules earlier in July. One of the reasons for this was that it made companies who produce Android phones pre-install its Chrome browser. This was possible due to the devices requiring Google Play in order to download apps. The second claim was that Google had made payments to manufactures and mobile network operators to agree to exclusively pre-install the Google Search app on their devices.

In other related news, Google also failed to disclose that the social networking site Google+ had a bug in which any third-party developer could see the profile information of users on the site. The flaw which existed from 2015 until this year could have impacted up to half a million private users. As a result, Google have confirmed they will be closing the site after the leak was made public this week.
Author: FE Analytics
08/10/18
Chinese Monopoly on Computer and Phone Manufacturing Poses a Risk to Tech Stocks
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Last week saw major exposés from the shadowy world of espionage. Much of the news has focused on details of the Russian operation to poison former
agent Sergei Skripal with a deadly nerve agent, this spy novel type attack has overshadowed the far more serious cyber security threats that were also
disclosed. The most disturbing is the news that Chinese intelligence agencies infiltrated several factories making computer components and managed
to install chips on motherboards that ended up in secure servers that were installed in US Navy warships, the CIA, the Department of Defence and a
number of other sensitive government agencies as well as in corporations such as Apple and Amazon.

That 90 per cent of PCs and 70 per cent of all mobiles phones are ultimately made in China shows how vulnerable the global supply chain is to an attack
of this nature. While the hack is certainly audacious, it is unlikely to be unique. Silicon Valley has long been accused of cooperating with US intelligence
agencies. Tech stocks sold off heavily on the revelations, but they will no doubt soon be forgotten. The risks these stories highlight should not be.

Car Manufacturing: Aston Martin Stutters on London Debut
This week saw the trade war start to affect Tesla. The new tariffs imposed by China meant that imports of Tesla cars were now subject to a 40 per cent tariff. In comparison, other non-US cars are subjected to a 15 per cent tariff. In a bid to reduce costs, the company is looking to speed up the construction process for its Shanghai factory. Also, this week Tesla’s share price sharply rebounded following a 12 per cent loss in the previous week after swiftly settling fraud charges. The SEC bought forward charges of impropriety after tweets by the chairman discussing plans to take the company private saw an increase in share price following the announcement in August.

Elsewhere, Aston Martin’s debut stuttered in the London trading market. Share prices opened on the morning at £19. The share price rose slightly after the opening bell to £19.15 before dropping, dipping as low as £17.75 on Wednesday. Overall, the current market capitalisation remains below the requirements to be included in the FTSE 100 Index.

Global Bonds: Sovereign Bonds Selloff Continues
The US Sovereign bond sell-off continued this week, this time due to the latest positive service sector growth. The Institute of Supply announced the non-manufacturing index rose to 61.6 for the month of September a gain of 3.5 from the previous month.

A reading above 50 is considered to indicate service growth. The US ten-year yield rose to 3.2 per cent and the two-year yield also increased.

Other regions were also affected by the US economic optimism, the German bund yields were the highest recorded since May. Some Eurozone countries also recorded yields rising with France up to 0.87 per cent and Spain’s 10-year yield also up. However, Italy’s yields were up earlier this week for different reasons as the government borrowing costs increased. As a result, the spread between the Italy’s 10-year bond and the German bund used as a measure of investor confidence widened. The debt load for the country is one of the highest recorded for the Eurozone countries currently standing at 130% per cent of GDP. The Italian government plans to combat this by aiming to reduce the deficit to 2.2 per cent of the GDP in 2020.

These contents are prepared for general information only. It does not contain all of the information which an investor may require in order to make an investment decision. If you are unsure whether this is a suitable investment you should speak to your financial adviser. This information is not guaranteed to be correct, complete, or accurate. Data Sourced from FE Analytics, and Bloomberg Finance LP
Author: FE Analytics
01/10/18
September revealed contrasting monetary policy announcements. The Bank of Japan avoided tightening its interest rate and bond-buying policies, maintaining both with a long-term view of meeting the 2 per cent inflation target. In contrast, the Bank of England hiked rates and the US Federal Reserve is expected to announce another round of rises. In addition, Turkey’s Central Bank moved to raise interest rates, increasing them to 24 per cent to deal with ramping inflation rates and currency depreciation. Meanwhile, the US equity market continued its extended bull run this quarter. The run has largely been driven by tech stocks, with the FAANG (Facebook, Amazon, Apple, Netflix and Google) stocks all helping drive performance. Apple broke the trillion-US dollar market capitalisation barrier, becoming Americas first trillion-US dollar company in August; Amazon joined the exclusive shortly after. Another factor for the S&P 500 rally was the corporate tax break authorised in the first quarter, which subsequently helped companies post better earnings growth. The emerging markets have continued generate negative headlines this quarter. The Turkish lira has been one of the worst performing currencies against the US dollar this year alongside the Argentine peso. South Africa entered its first technical recession since 2009, with GDP declining by 0.7 per cent in the second quarter, causing the rand to decline. Even an increase in the oil price wasn’t enough to prevent the emerging markets sell-off, with the effects spreading to the rest of the developing markets. Read the full review here.
Author: FE Analytics
01/10/18
View PDF of this market update from FE Analytics.
Last week the Brexit waters were muddied further at the Labour party conference, with Shadow Chancellor John McDonnell and shadow Brexit secretary Sir Keir Starmer putting forward conflicting positions in consecutive speeches. McDonnell appeared to favour a referendum on a bad deal versus no deal, while the more pragmatic Starmer thought an option to just bin the whole idea ought to be considered as well. While Labour’s position on Brexit has been incoherent for a while, this would have been a perfect opportunity to come up with a real alternative; given there is a very good chance the current government implodes, and this becomes Jeremy Corbyn’s decision. Elsewhere Donald Trump made a splash at the UN by forcefully laying out his America First agenda and calling out all the other nations he felt had wronged the US. The best single moment was when one outlandish claim over the success of his presidency raised an audible laugh from the audience of world leaders. That a US president could be so isolated at such an event is surely a bad sign for the rapid resolution of the burgeoning trade war

EM: MSCI PROPOSES TO BOOST CHINESE A-SHARES WEIGHTINGS
MSCI announced this week that it is set to launch a consultation into whether it should increase the China A-shares weightings within the MSCI Indexes. Their current stance is a five percent inclusion of China A-shares within composite indexes such as the MSCI Emerging Markets index along with the MSCI China Indexes. The new proposal would see the inclusion factor grow four-fold to 20 percent of the index. In further welcoming news for China, FTSE Russell is also expected to incorporate the A-shares into the global emerging markets index which would trigger new foreign inflows into the Chinese market. Elsewhere, FTSE Russell also granted Poland “developed market” status. A growing economy with the real year-on-year GDP growth currently at five percent, a steadily declining unemployment rate now down to 5.8 percent and a strong regulatory environment have all provided a compelling case for the latest upgrade

US: FEDERAL RESERVE HIKES INTEREST RATES
In a widely anticipated move this week the Federal Reserve hiked short-term rates again for the third time this year up 25 basis points. Treasuries rallied while stocks went down briefly after the news with the S&P 500 dipping before rebounding a day later. There are further increases expected this December and next year as monetary policy tightens with US growth set to continue. The Federal Reserve has remained on course with interest rate hikes, despite pressures coming from trade disputes having already impacted the deficit but not the inflation or unemployment figures. The Fed also refused to cave into political pressure, with President Trump expressing his desire for a low interest rate environment. Nevertheless, the President doesn’t have the power to remove the Federal chairman and with the latest hike already priced into the market the impact of Trump’s ire remains limited.

DENMARK: GOVERNMENT AT RISK OF LOSING AAA CREDIT GRADE
Danske Bank continued tumbling this week due to the ongoing money laundering scandal. Described currently as the worst scandal in Europe, the stock has been on a downward turn since March last year with the price currently hovering around 168.45 Danish Kronas. Between the periods of 2007 to 2015, around $235 billion was moved through the Estonian branch of the bank triggering an inquiry this month. A large portion of the inflow has been highlighted as suspicious and the bank is expected to receive a substantial fine. The sheer size and scale of the issue prompted S&P Global Ratings to issue a warning of a possible downgrade to the Danish Governments AAA credit grade. The Systemic Risk Council, which is tasked with identifying and monitoring financial risks, also voiced concerns that the largest credit institution’s troubles poses a risk to the entire sector and Denmark’s international reputation. The council advised the government to increase the capital buffer that all Danish financial firms hold to one percent with a further increase of 0.5 percent also recommend for first quarter of 2019.
Author: FE Analytics
21/09/18
View PDF of this market update from FE Analytics.
This week the background noise of uncertainty over Brexit increased to a deafening roar as Theresa May took her Chequers plan to Salzburg only to have it dismissed out of hand. While much of the press has been fuming about the way the EU27 have treated the Prime Minister, this outcome should not have been a surprise. The Chequers plan has all along been less of a workable solution to Brexit and more of a hotchpotch of ideas, intended to satisfy the demands of the Tory backbenches rather than the EU. While the tone from Barnier and Tusk has been more than a little condescending, that we still don’t seem to have a clue what we’re doing with just six months to go is utterly ridiculous.

There has been a theory all along that May has been pursuing a plan of “strategic incompetence”, deliberately making as little progress as possible while all the while stringing along the over-excitable Brexiteers she has to work with in the cabinet. The end game being that she can stumble into an extended transition period under the cover of having no alternative. While this will actually be something of a win it is also a high-risk gamble.

THE MARKETS THIS WEEK
FTSE 100 +1.76%
S&P 500 +0.91%
Nikkei 225 +4.59%
Euro Stoxx 50 +2.63%
Hang Seng +2.45%
US 10 Yrs +0.08%
UK 10 Yrs +0.05%
Brent /Crude +0.99%
Gold +1.00%
Wheat +8.49%
GBP USD +1.61%

JAPAN: CENTRAL BANK ANNOUNCES NO CHANGE IN INTEREST RATES
This week the Bank of Japan decided to keep interest rates and its asset purchase programme unchanged. The BoJ kept the short-term interest rate at -0.1% in addition to continuing with its purchasing of government bonds to lower long-term yields, with an eventual goal of meeting the two percent inflation target. In contrast, the Federal Reserve is expected to be more proactive and raise interest rates while the ECB announced last week that it is planning to end its bond-buying programme by the end of the year.

Meanwhile, Japan’s trade deficit in August continued to expand. Exports increased with cars, ships and semiconductor products all contributors to the growth. Imports also went up with the main driver being the recent rise in oil prices. China and the US continue to be the largest importers of Japanese goods, the year-on-year exports to China grew by 12.1% and the US rose by five percent. Overall, the adjusted trade balance showed a deficit of around a 190 billion Yen.

GLOBAL: GLOBAL BOND YIELDS ON THE RISE
Global bond yields increased this week with yields rising in most developed economies. The US 10-year government yield broke the three percent mark, the German 10-year bund yield hit 0.5% and the British 10-year bond yields also increased off the back of the latest inflation news. The consumer price index, a barometer of inflation jumped to 2.7% appearing to vindicate the Bank of England’s move last month to raise interest rates in an effort to slow down price increases.

The move by the US government to impose a 10% tariff on around $200 billion of Chinese products appeared to have minimal impact to the US 10-year treasury yield as attention instead turned to the US Federal Reserve, who are expected to announce a more hawkish monetary policy with further increases in interest rates predicted. The bund yield increase came ahead of the German government selling an estimated 2.43 billion euros worth of 10-year bunds.

OIL: BRENT CRUDE PRICE SPIKES
Hurricane Florence, US crude inventories falling and the lack of a clear replacement for Iranian oil production have all lead to the Brent crude oil price surpassing the $80 per barrel mark. President Trump urged the OPEC block to lower and maintain the oil price, as a rise in domestic fuel prices could have an adverse effect on the mid-term elections which are set to take place next month. The OPEC nations and allies are set to meet this weekend in Algeria to talk about the oil market and discuss their production levels.

Elsewhere, the sanctions against Iran set by the US are starting to bite. Iran’s crude oil exports dropped by 34.9% over a period from the end of April to the end of August as countries start to turn away from importing Iranian oil. Saudi Arabia’s increased oil production could cause political friction with Iran who would be against the potential monopoly of oil exports within the region. However, Russia’s recent rise in oil production could help ease those fears once the sanctions come into effect.
Author: FE Analytics
14/09/18
View PDF of this week's update from FE Analytics.
This week, we got further support for the status quo. Positive economic data, including a higher than expected GDP data was coupled with a decision from the central bank to leave things alone and let everything carry on as it is. Unfortunately, our political leaders don’t have the same appreciation for inactivity. Boris Johnson especially appears to believe that he gets paid by the word and treated us to what appears to be the opening salvo in his battle for the Tory leadership. While even Brutus would have raised an eyebrow at the amount of plotting going on in the Tory party, it does at least appear that they are giving up on trying to control Brexit and have instead focused on grasping the leavers of power afterwards.

Elsewhere, Hurricane Florence has made landfall in the Carolinas and has already begun to have a serious impact. A competent response to the storm will be critical for Donald Trump and the republicans if they are to retain any sense of credibility as a party of Government and to survive Novembers mid-terms elections. George W. Bush’s approval ratings never recovered from his botched handling of hurricane Katrina.

UK: Economic Growth Picks up over the summer
This week, the Office for National Statistics reported GDP results between the months of May to July. GDP grew by 0.6% during this period, mainly carried by the service sector which helped fuel the quickest economic growth for the UK this year. The cause of the growth was linked to positive results from the retail industry with factors such as the hot weather, England’s extended run in the world cup and the royal wedding all helping to drive sales this summer. In addition, the month-on-month output for the construction industry was also up 0.5% in the month of July.

Over the last 5 years, GDP has experienced quarterly fluctuations with slight increases in growth along with some periods of shrinkage. In the last two years the results have tended to fall between 0.2% to 0.4%. Overall, year-on-year GDP growth continues to be stable hovering above 0.5% with notable spikes recorded in the third quarters of 2012 and 2013.

Global: Lira Rallies after central bank's announcement
Turkey’s central bank decided to raise interest rates yesterday. The one-week repo rate was increased to 24%. The lira, one of the world’s worst performing currencies this year increased by 4.6% against the dollar shortly after the announcement. The move appeared to directly contradict president Erdogan’s earlier calls to reduce the interest rate in order to lower borrowing costs. Erdogan also proposed to outlaw the use of foreign currencies within the Turkish property market in a bid to help the flagging lira.

Meanwhile, the two biggest economies continued their standoff this week. President Trump recently applied additional duties on $50 billion of Chinese imports and this week, the White House are reviewing applying further tariffs to $200 billion worth of products. However, tensions look to be thawing as corn and soybean futures fell slightly. The prices for both commodities were propped up by supply concerns due to the Chinese government’s move to apply higher tariffs on a selection of US agricultural imports earlier this year.

Eurozone: European Central Bank Holds Interest Rates
The European Central Bank (ECB) announced net asset purchases to be cut back by EUR 15bn along with plans to end bond purchases by the end of this year. In addition, the ECB also announced that it will look to slightly cut its growth target for the periods of 2018 and 2019 along with keeping interest rates unchanged for the Eurozone. However, the council remains confident that it will reach its inflation target even with the cutback. ECB president Draghi, linked the downward revision to weaker foreign demand.

Elsewhere, political risks remain within the Eurozone. Sweden’s latest election ended in a deadlock. The centre-right bloc held 40.2% of the votes while the centre-left took 40.6% of the vote. The votes made by Swedes abroad are also expected to be counted this week but 99% of the votes have already been accounted for. Sweden faces a period of political uncertainty after both main parliamentary blocs fell short of the majority required. The prime minister confirmed that he would not be resigning because of the election and stressed the need for cross-party cooperation so that a new government can be formed.
Author: FE Analytics