Market Updates

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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
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
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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