Market Updates

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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.

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%

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 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.

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