Market Updates

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
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

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

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.

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
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.

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
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