Duncan Donald

Mon, Nov 5

Weekly Markets Update - 05/11/2018

A more positive feeling in the markets last week, with equities recovering a part of the losses recorded in October. It felt like the appetite for risk has return to the market with the yield on the U.S. 10 Year Bond resuming the upside movement towards the previous high recorded at the beginning of October. We also saw Italian yields begin to relent as Finance Minister Tria vowed to reduce their budget deficit.

In the U.S., the job data stayed strong with the unemployment rate remaining at 3.7% and a healthy job creation. This reading came to offset lower than expected readings coming from the manufacturing sector earlier in the week. The better than expected job report makes another increase in interest rate by Fed in December almost a certainty, with the market pricing in a hike at 75% chance.

We are in the mists of the reporting season, with roughly half of the S&P 500 companies reporting so far, 84% of them have reported earnings exceeding the market expectations.  Probably the most significant company that has reported last week was Apple, beating the market expectation on earnings and revenue side, but disappointing on their guidance for the next quarter. The holidays season traditionally is the most lucrative quarter for Apple. Apple joins Amazon in guiding lower revenues during the holidays season and raising doubts about the future growth of the tech sector.  

The positive sentiment has been helped by U.S. president Trump announcing that a trade agreement with China is a possibility following private talks with President Xi Jinping. This comes after weeks in which President Trump showed reservation regarding a trade agreement and threatened to impose more tariffs on Chinese imports. Political analysts are raising questions of the timing of this announcement that happened just days prior to the U.S. midterm elections. The market took Trumps sentiment very positively and even when Larry Kudlow the National Economic counsel under Trump cast doubts over whether an agreement could be made, the positivity was unrelenting which is a significant shift from what has become the norm.

It was an eventful week in the U.K. The week started with Chancellor of the Exchequer, Philip Hamond, presenting the budget in the House of Commons on Monday. The public borrowing is expected to be 1.2% of GDP in 2018, lower than the estimate in March, but will increase to 1.4% next year. A surprise on this autumn budget statement was the introduction from 2020 of a new digital services tax of 2% of revenues of big technology companies with revenue above £ 500m. The U.K. will be the first G7 country introducing a tax on digital revenue. The chancellor has suggested that the era of austerity is “finally coming to an end” but a no-deal Brexit will derail the progress. This was recognised in the budget by a £500m increase in the funds allocated for Brexit preparation.  

The Bank of England kept its benchmark interest rates unchanged on Thursday and hinted that a smooth Brexit could quicken the bank's rate-hiking cycle.

For the Pound Sterling it was a week of two halves. In the first part of the week the Pound continued to lose ground against all the major currencies. Mid-week pound sterling strengthened rapidly on the back of the report indicating Brexit Secretary Dominic Raab being confident about the Brexit deal being completed by the end of November. Another piece of news emerged indicating that a deal has been reached for the financial services sector. This last news has been denied by both No 10 and EU in matter of hours with the date of a deal completion not being confirmed yet, but similarly to the trade war situation the market moves seem to have switched to optimism.

GBP/USD Hourly Chart


Next week the market will pay attention to the Fed interest rate decision and the comments regarding the future interest rate policy following a good job report.  Whilst no change is expected from the Fed the movement will come from the statement with their interest rate outlook being the driver. We also see services PMI will be monitored closely to see if the above average growth trend will continue. The producer inflation will be reported on Friday and is expected to show a monthly increase of 0.3%

In the U.K., the preliminary third quarter GDP is expected to show an expansion of 0.6%. Services PMI are also expected to show expansion of the services sector but at a lower rate than in the previous months.

We also hear from the central banks of Australia and New Zealand. Whilst we have seen long periods of stagnation in both of these countries, both of their currencies certainly benefitted from the perceived trade war progression in the last week breaking back through significant downtrends. However, neither countries are close to being able to hike rates with no change expected from both this week

AUD/USD Daily Chart


The most important event over the next week are the U.S. midterm elections. For what they worth, the polls are indicating a continuation of the Democrat dominance in the House of Representative with the Republicans retaining a narrow majority in the Senate. For the Senate the outcome in some states are far too close to call and in the context of record anti-Trump young participation to the mid-term elections a Democrat Senate is possible. A Democrat majority in both houses could reopen the President’s Trump impeachment speculations. This could have a negative implication on the U.S. risk assets but generate a relief rally in the emerging markets.  We expect to see the results of the election early on Wednesday am.