Duncan Donald

Mon, Oct 1

Weekly Markets Update - 01/10/2018

We start the week on a more upbeat note with Stocks and risk currencies trading positively after the US, Canada and Mexico agreed to maintain their tri-party trade agreement after much speculation that Nafta was set to be dissolved. The new agreement which goes by the name The US, Mexico and Canada Agreement will replace and enhance the old NAFTA agreement. The agreement finally shows the US can resolve trade negotiation issues, so naturally we see this positively reflected in the markets.

In the UK we remain at an impasse over the contentious Irish border issue, we saw no real tangible progress in the negotiations last week with fading optimism for an agreement being in place prior to the October proposal for submission.  Naturally, the weight of Brexit is stifling the UK economy as was reflected in the lower revision to business investment we saw in last week’s GDP. The uncertainty has led to investment falling over the last 6 months.

Last week’s Labour Party Conference didn’t really stimulate the markets. Their proposals were if anything anti-business with a plan to enforce the sharing of dividends via employee ownership funds potentially transferring up to £500 per year to employees, with any surplus going to the Treasury.  This week we have the Conservative Party Conference where Prime Minister May will be closely scrutinised as will the support and unity of her party.

This morning we had UK lending data which showed that borrowing has started to decline, which is a natural reaction to the recent hike in interest rates. Whilst public borrowing had decreased with the exception of credit card borrowing, we did see a slight increase on non-UK resident investors acquiring around 14.5 billion of UK Gilts.

Despite calming words from Italy’s leading politicians, the markets concern over Italian bonds remains intact. Friday brought another surge in yields taking Stocks and the Euro lower.  Many Italian Banking stocks were suspended limit down on the day, which tipped into the global stock markets (before US stocks rallied well dragging markets back up). Italian bonds look under pressure with many predicting we could see them as high as 3.5-4% by year end. The end of the ECB’s asset purchasing scheme timed for November could prove further problematic for Italy.

In the US the week ahead brings some important data. First up will be the ISM Manufacturing Data which is expected to fall slightly to 60.3 from 61.3 last month, which will naturally be related to the  Trade War. On Wednesday, expectation is for a month on month improvement in the Non-Manufacturing sector from 58.5 to 59.5. The big data comes at the end of the week with the Employment report. We are used to seeing employment impress and indeed this week should be no different. Whilst consensus is for a slight contraction to 188k from 201k there is potential for an upwards beat.  I think the figure to watch here is average earnings, when you have a buoyant jobs market its imperative that earnings match inflation, so this piece of data will be closely monitored by the Fed. Expectation is for a slight fall from 0.4% to 0.3%, so any further disappointment could lead to downside pressure on the dollar.

Have a great week ahead.