Weekly Market Commentary 25 October 2019

European Markets Rebound While Brexit Momentum Stalls
This week Brexit has returned to the status quo, popular in principle but impossible in practice. The complexities of leaving the European Union, or the cost of doing it simply, requires a degree of compromise that seems impossible to achieve. Factions that were united around the vison have splintered over the detail; without external guidance over what the public prioritise, either from an election or referendum, we see no end to the impasse. Despite being in limbo markets are mostly up. Limbo is a marked improvement on recent conditions.

Elsewhere possible positive signs for the French economy and improving sentiment in Italy have seen European markets surge this week, despite lacklustre data out of Germany. While this might prove temporary, it does offer hope that the global economy might get away with merely slowing rather than contracting. Much of the gains for the week come from improving expectations however, one bad headline could see them evaporate.

Global: Infosys Share Price Drops Following Complaint
This week allegations of aggressive accounting rocked Indian software service giant Infosys with shares plunging 16 per cent after the news broke. A group of employees allege that both the CEO and CFO of Infosys worked in tandem to “boost short term evenue and profits”. Infosys was launched in 1981 by six engineers and a $250 loan and has since grown to become the second largest software company in Asia employing 125,00 people worldwide with revenues of $10.9bn last year. The company is investigating the claims.

Elsewhere the planned merger between Just Eat and its Dutch equivalent Takeaway.com threatens to be gate-crashed by Prosus. The Amsterdam-listed offshoot of South African tech giant Naspers have their eyes set on Just Eat and this week offered an all cash bid of £4.9bn. Just Eat has already rebuffed three prior offers but with shareholders starting to voice their opposition to the Takeaway merger, a higher bid may swing it in Prosus favour.

Eurozone: German and France, A Tale of Two Diverging Economies
This week’s soft Eurozone data made for compelling reading with the PMI data showing a contrasting tale of two key economies. While recession fears mount in Germany, as the private sector struggles to offset manufacturing weakness, France continues to grow. Business activity beat expectations rising to 52.6 points from 50.8 last month driven by the service sector. Interestingly, French manufacturing also defied the global downward trend up by 0.4 points from the last reading (50.1). With the ECB maintaining rates at ultra-low levels, pressure is starting to mount on the German government to spend more in order to keep their economy growing.

The two stock markets however, are surprisingly correlated. So far in 2019, despite the diverging economics, the French CAC 40 index is only around 3% higher than the German Dax, with the two markets converging more recently.

China: Central Bank Pumps Money into Markets
China’s central bank pumped in 250bn Yuan (£27.5bn) into its market this week. The government is keen to navigate the expected spike in demand for cash as companies rush to meet the tax deadline (Oct 24). This was done via a seven-day repurchase agreement (buying securities from banks with an agreement to sell them back in the future) at an interest rate of 2.55 per cent. In addition to ensuring a healthy liquidity supply, the government is also seeking to keep credit growth at an appropriate pace while minimising debt build-up as the economy slows down. GDP growth was six percent last quarter – its weakest rate in almost three decades.

Meanwhile the Chinese Communist party is on the hunt for a new chief executive for Hong Kong. Following months of unrest, the popularity of the current incumbent Carrie Lam has waned, and Beijing would like to find a leader that is both popular in Hong Kong but it can also trust. That their track record has been poor so far. Two out of their first three leaders stepped down early and the fourth, Carrie Lam is proving equally disappointing.

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