Duncan Donald

Mon, Oct 22

Weekly Markets Update - 22/10/2018

We open the week looking at equities and the general risk theme, with global stock markets making a somewhat surprisingly positive start. If we look at the major geopolitical developments, there is certainly justification for some surprise at this outcome.  The US and France continue to investigate the assassination of Jamal Kashohggi, the journalist in Saudi Arabia, to ascertain where the definitive order for action came from.  Naturally, if it is ascertained there was a high level instruction, this could lead to severe repercussions.

We also had news over the weekend from US President Donald Trump that he is pulling the US out of the INF (Intermediate Range Nuclear Forces Agreement) with Russia, alleging that Russia had breached the terms of the agreement. No explanation of this breach was offered by Trump, so the markets will be very responsive to any developments here and potential retaliations from Russia.  

The situation with the Italian debt to GDP target continues to weigh heavy on the Eurozone, and the Moody’s rating agency downgrade of Italy to just one level above “Junk” will certainly not help their plight. Italian 10-year Bonds continue to make almost daily multi-year yield highs (10yr since 2014). Despite a fractious relationship between Italy and the European Commission, Italy’s PM Di Miao does continually reiterate that Italy will remain in the EU and the Euro, which is giving the market slight comfort.  

Whilst there were these many factors to point towards lower equities and/ or a buying of safe haven assets to start the week, we have seen a relatively positive start for the equity markets, with the Shanghai Composite leading the way with its biggest up day since 2016, up over 4%.  The markets are clearly taking comfort from the protectionist action taken by China, following the weaker growth figures late last week.

The Pound started the week on a downward trajectory, as UK PM Theresa May remains under even more pressure, despite the EU Summit and her chance to formalise a deal last week. Again, she walked away having made no progress and whilst the EU did open the door to an extension of the transitional period to facilitate finding a solution to the problematic Irish border issue, the reality of her potentially accepting this, puts her under further pressure. She is now in the unenviable situation where most solutions are met with fierce opposition from either the EU, the public (over 700,000 pro EU campaigners took to the streets of London at the weekend to urge for a second public referendum vote) or from within her own party (and coalition). Sources within the PM’s own party have indicated that, the letters of no confidence in her are reaching the crucial level to force an internal leadership challenge.  With little in the way of meaningful data for the UK this week, we again focus on Brexit developments.

The main news and data events come later this week, starting on Wednesday with the Bank of Canada interest rate decision, where analysts predict a 75% change of a hike of 25 bps to 1.75%. Thursday then sees the ECB Interest Rate decision. Whilst we expect no shift in monetary policy (as the ECB remain on-track to end Quantitative Easing in December this year and potentially move towards hiking interest rates in the summer of 2019), Mario Draghi’s testimony and any reference to the plight of Italy could cause a market reaction.  Then, finally on Friday we see US GDP data. Having become quite familiar with US data continuing to grow, expectation is for a slight fall in the headline GDP from 4.2% to 3.3%.

Have a great week.