Duncan Donald

Mon, Sep 10

Weekly Markets Update - 10/09/2018

With the markets exiting the summer holiday period it was another typically volatile week last week. Obviously, the trade war narrative, Brexit and the Emerging markets situation dominated the headlines and brought volatility.

In the UK the talks between the EU’s Barnier and Brexit negotiator Raab were ongoing and it could even be argued moderately progressive last week.  Barnier was vocal in stating that 85% of the UK’s proposal was agreeable, naturally this brought slight positivity to the markets, but of course the finer points of what is in that final 15% and whether mutually beneficial compromise can be found will be key for progression.  There was also a whipsaw in the markets as “sources” claimed that Germany’s Angela Merkel was prepared to be accommodative with the UK to ensure future trade, this really brought positivity to the pound, naturally, Germanys support and their influence within the EU would have been enormously positive for the UK, but within a couple of hours this statement was denied by Merkel herself and the market duly corrected.

The crucial aspect of the negotiations lays with the border control in Ireland and ‘when’ or ‘if’ this can be achieved. The last week showed some progress but this remains the potential stumbling bloc for progress.

This week we have already seen the release on GDP numbers which showed a 0.3% monthly rise in GDP despite the Brexit backdrop, with the services sector leading the way.  Tuesday brings us Average Earnings and Employment data, both are expected to bring further positivity.  Thursday, we have Mark Carneys Monetary Policy Committee meeting at midday. On the back of a UK rate hike last month and continually positive data from the UK there is no expectation for rate movement from this meeting, with the only potential volatility coming from any Brexit comments upon release of the statement, or from Mark Carney when he speaks on Friday.

In the US key economic indicators remained strong with the release of employment data on Friday.  Non-Farm Payrolls came in above expectation at 201k against expectation of 191k and last months number of 147k. There was also a strong beat in Average Earnings numbers.  US stocks and the currency had been having a heavier week with Trump shifting his trade war attentions on Japan and the implementation of greater regulation on leading US tech companies, so this positivity was welcome news.  Attention turned to US rates and whether they will hike in September, with economists revising their thoughts and 70% now forecasting a hike could be on the cards.

Just before the London close on Friday we did see Trump state that he was considering an additional $267 Billion of tariffs onto Chinese goods in addition $50 Billion and $200 Billion already known. This weighed heavy and brought the S&P down to the weekly lows at 2,863 so whilst it was the first down turn we have seen in the S&P in quite some time it remains 7.8% up on the year to date. But, there is a nervousness in the markets, with the latest threat Trump has encapsulated virtually all Chinese imports, so it is likely we could see natural retaliation from China to these threats.

This week in the States we see the release of PPI data on Wednesday followed by Inflation data Thursday and finally Retail sales on Friday where the market will await almost final confirmation that trade war aside the Federal Reserve could be prepared to hike again this month.

In the Eurozone we also have an interesting week ahead. It started with the news that the Swedish election had brought no clear victor and they will no have weeks and possibly months of internal negotiations to form a leading party. What is a concern is that the perceived right-wing anti-EU and immigration party took a strong foothold, this brought out the Euro lower in Asia open. Last weeks German Industrial production was also a disappointment with problems in the auto sector attributed to the lower reading.

All eyes will be on the ECB on Thursday this week, when Mario Draghi delivers the ECB’s interest rate decision. The ECB seem content with a steady approach to the tightening of interest rates. It is expected that they will reiterate that they will cease with the asset purchasing programme in December. Perception is that the ECB will unlikely move towards interest rate normalisation until at least summer 2019. But in his statement, we will get a chance to hear from Mr Draghi in one of his last meetings as ECB leader.  He will most certainly be met with questions in the Q&A session regarding Brexit, Emerging Markets Contagion, Trade War, Italian Bonds, Sweden and his own successor, with a list of potential stumbling blocks for Europe like that, it is little wonder they are carefully considering their rate path and in no hurry to lift off.

In the Emerging markets we start the week looking at the familiar sight of South Africa and Turkish currency sitting 1% down on the day. We again saw a week of limited progress last week with just one day in the ‘green’ naturally fears over contagion continue to grow with Emerging Asia growing with concern as Malaysia, the Philippines and Indonesia saw notable selling.

The main event on the radar will be the Turkish and Russian Central Bank Meetings later this week where both will have the opportunity to show how far they will go to protect their ailing stock market and currency. We know that Erdogan has historically been very anti rate hike but at this moment in time it seems one of the few options available to protect the economy.