Market Updates

01/10/18
View PDF of this market update from FE Analytics.
Last week the Brexit waters were muddied further at the Labour party conference, with Shadow Chancellor John McDonnell and shadow Brexit secretary Sir Keir Starmer putting forward conflicting positions in consecutive speeches. McDonnell appeared to favour a referendum on a bad deal versus no deal, while the more pragmatic Starmer thought an option to just bin the whole idea ought to be considered as well. While Labour’s position on Brexit has been incoherent for a while, this would have been a perfect opportunity to come up with a real alternative; given there is a very good chance the current government implodes, and this becomes Jeremy Corbyn’s decision. Elsewhere Donald Trump made a splash at the UN by forcefully laying out his America First agenda and calling out all the other nations he felt had wronged the US. The best single moment was when one outlandish claim over the success of his presidency raised an audible laugh from the audience of world leaders. That a US president could be so isolated at such an event is surely a bad sign for the rapid resolution of the burgeoning trade war

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

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

DENMARK: GOVERNMENT AT RISK OF LOSING AAA CREDIT GRADE
Danske Bank continued tumbling this week due to the ongoing money laundering scandal. Described currently as the worst scandal in Europe, the stock has been on a downward turn since March last year with the price currently hovering around 168.45 Danish Kronas. Between the periods of 2007 to 2015, around $235 billion was moved through the Estonian branch of the bank triggering an inquiry this month. A large portion of the inflow has been highlighted as suspicious and the bank is expected to receive a substantial fine. The sheer size and scale of the issue prompted S&P Global Ratings to issue a warning of a possible downgrade to the Danish Governments AAA credit grade. The Systemic Risk Council, which is tasked with identifying and monitoring financial risks, also voiced concerns that the largest credit institution’s troubles poses a risk to the entire sector and Denmark’s international reputation. The council advised the government to increase the capital buffer that all Danish financial firms hold to one percent with a further increase of 0.5 percent also recommend for first quarter of 2019.
Author: FE Analytics