Market Updates

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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.
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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
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Federal Reserve Minutes Hints towards a Quicker Pace of Rate Hikes.
Last week the paranoia over interest rates that has haunted the markets throughout October looks a little more justified, following the release of the minutes from the September meeting of the US Federal Reserve’s rate setting body, the Open Market Committee. The latest sell was off sparked by fears that the bank might hike rates faster than expected, and it appears those fears were well founded with several members of the committee pushing for rates to move into restrictive territory.

Elsewhere another market fear was stoked, this time of Britain facing a chaotic exit from the European Union. Theresa May is desperately trying to negotiate the final withdrawal agreement but getting a settlement that resolves the Irish backstop requirements, market access for businesses, minimises barriers to trade and satisfies the Tory backbenches is looking increasingly unlikely. This will probably be one of the last acts of the May premiership, what she does next will likely set the course of the British economy for a generation.

Technology: Netflix Share Price Soars after Earnings Report
Last week saw a recovery in the tech stocks that had been beaten up over the last few weeks. They have been led by Netflix, which experienced a dramatic reverse in sentiment following its latest quarterly earnings report. The key metric for investors, the number of new subscribers had a surprise drop in Q2 but managed to comfortably beat the company’s forecast of five million expected new users with the actual figures coming in at close to seven million. As a result, the share price of the stock leapt by 9.7 per cent. In addition, the S&P communications sector, which includes Netflix and was previously the third worst performing sector in the S&P 500, rallied to become one of the market leaders.

Despite this, Netflix continues to burn through cash with close to a billion dollars spent this quarter, although the company remains optimistic that cash flow would be flat for 2019 as profits grow to pay for the spending. Netflix continues to spend aggressively in order to expand its international video library. This in turn helps the company increase its competitive advantage as it gears up to expand the user base of countries such as India and Brazil.

UK: Wage Growth Outstrips Inflation Amidst Political Uncertainty
UK wage growth recorded its fastest rise since the financial crisis according to the latest earnings and working hours report published by the Office of National Statistics. Average earnings excluding bonuses rose to 3.1 per cent in the three months to August. Unemployment remained flat at four per cent even as the number of people employed was down 0.2 per cent from the previous three-months. This slight decrease in employment numbers was attributed to the increase in the number of people classed as “inactive”.

In additional positive news, total wage growth outstripped inflation at 2.7 per cent in comparison to 2.4 per cent for the same period. While this may cause the Bank of England to consider further interest rate hikes, the continued uncertainty around the Brexit outcome will probably mean it remains cautious. Summit talks this week broke down leaving both sides without an exit agreement; as a result, Prime Minister Theresa May signalled she is open to extending the deadline and while a special November summit looks unlikely, there is a further summit arranged for December to conclude a deal.

EM: Chinese Renminbi Drops to its lowest Point in 21 Months
The Chinese Renminbi (Yuan) this week dropped to its lowest level for the last 21-months, down six per cent. The trade war escalation, continual rate hikes by the Fed and a slowdown in GDP growth have all played a part in the currency sell-off which has gathered momentum since last June. The currency currently stands at 6.94 Rmb per dollar which is very close to the low of 7 Rmb per dollar recorded in the last global financial crisis.

It would be difficult to ignore the psychological impact of the currency crossing the 7 Rmb per dollar mark as the sell-off could accelerate at this level. Investor confidence, already dented by the steep fall in the Argentine Peso and Turkish Lira, could collapse and trigger a sell-off in other emerging market currencies. Due to the limited transparency from the Chinese central bank, it is unclear as to whether the institution will allow the currency to drop past this barrier or intervene to stop the currency from falling further.
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Author: FE Analytics
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
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