Duncan Donald

Mon, Oct 8

Weekly Markets Update - 08/10/2018

Last week we finally saw a bit more positivity come into the Brexit saga.  With the main event for Brexit last week being PM Theresa May’s Conservative party conference I think its fair to say the market was relieved that it didn’t go badly.  There were loose hopes that she could use this event to outline potential changes to her Chequers deal, but this was not forthcoming. Her speech was relatively Brexit light overall, but the key concern was whether she could get through the event without any form of internal party challenge, and with nothing serious forthcoming the market drew slight positivity.  However, the real move started on Friday when the ongoing “Sources” comments from the EU and UK took a far more positive tone, as it was confirmed that there is a strong desire from the EU to assist in delivering a workable solution, this sentiment has not often been heard in the negotiation to date and brought about optimism that a deal can be reached.

The key focus for the UK this week will come in the form of GDP and Manufacturing Data.  It will be very interesting to see the impact of Brexit concerns on these numbers. Consensus opinion has GDP falling to 0.1% from 0.3% last month but expectation for the manufacturing data is modestly positive.  Whilst both could have an impact on the markets, the core focus remains progression of the Brexit negotiations.

The main driver for global asset classes last week was a speech from Jerome Powell where he was incredibly bullish on the US economy . Now its no surprise that Powell sees further rises, but it was his hint that they may come sooner that surprised the market. In fact, he seemed unconcerned by the potential speedbumps of Brexit, Trade War, Emerging markets woes and the Italian Budget. This brought a bid to the Treasury market, with yields breaking and sustaining the highs.  Rising yields does, however, hurt the Equity markets, which have been enjoying continuous record highs, but this news brought a shift and US and global stocks took a downward turn, with the S&P, Dow and Nasdaq leading the way and global Equities following suit.  This trend has continued into this week with some of the Asian markets catching up after national holidays last week.

This week’s biggest piece of data will be US Inflation number on Thursday. With the markets all but ignoring some poor US employment data on Friday, I would expect inflation to have a bigger impact. Estimates are for a slightly lower number of 2.4% versus the 2.7% year on year. But, the month on month number is expected to be slightly higher at 0.2% versus 0.1%.  Higher inflation would give Powell and The Federal Reserve further reason to speed up the rate normalization process.

In Emerging markets, it was a slightly less volatile week, USD/TRY had settled somewhat and was starting to make lower highs in its very gradual pullback.  This was aided by last week’s progress with Canada and a quieter week in the US-Sino discussions.  Watch out for the result of the Brazilian Elections this week.

Have a great week!