Duncan Donald

Mon, Nov 12

Weekly Markets Update - 12/11/2018

Last week was very much a week of two halves with the shift to optimism very much being apparent across most asset classes ahead of the US midterm elections and the improving Brexit backdrop.  In the case of the US elections, delivery matched expectation when Trump’s Republican party maintained their control over the Senate but conceded control of the House to the Democrats.

Whilst this is not the worse case scenario for Trump, it will most certainly stifle his ability to pass new initiatives and bills through the House. If we look at history, this is often the case and typically we see a positive performance by the stock market as fresh legislation that can be damaging to company’s performance and activity is not passed during these periods. So, it was no surprise that we saw a strong performance from the stock market, until the Federal Reserve delivered their latest decision on interest rates on Thursday night.

With Jerome Powell’s Fed progressive interest rate policy having been heavily criticised in recent months by Trump, there was a chance that we could see a slightly less hawkish delivery. With interest rate remaining unchanged as expected, the Fed remained consistent with their policy and rhetoric, leaving us in little doubt we will see them resume with rate hikes in the December meeting, eroding some of the recent gains in the stock market.

In the UK, we saw the latest twist in the Brexit saga. The situation had been progressing more positively recently, with PM May looking like she was going to be able to form a concession heavy agreement in November.  The progress had been very supportive of the Pound, bringing it up to nearly 1.3200 versus the US Dollar. There has always been concerns on her ability to get the deal through Parliament, but over the weekend we heard from former Conservative ministers and Sammy Wilson (Brexit spokesman from the DUP), that they would be prepared to vote against a deal that was not putting the interests of the UK ahead of the EU and was not achieving what the public had voted for. With evident opposition within her own party and the coalition party, May could be reliant on pro Brexit Labour MP’s voting to pass her deal, which is far from an ideal solution. Naturally this is weighing heavily on the Pound, almost erasing all the gains made over the recent week as it falls back towards 1.2850 versus the US dollar, despite strong UK GDP data on Friday.

GBP/USD Daily Chart

In Australia and New Zealand, both central Banks chose to leave interest rates on hold last week and both countries enjoyed a week of positive economic data. With riskier products being in demand towards the end of the week and domestic progression, both of these countries’ currencies enjoyed strong gains last week.

Italy has until tomorrow to respond to the European Council (EC) with explanation over their forecast budget deficit and growth plan. The levels previously delivered to the EC were below the targeted rate, and they wish to see fuller explanation or at least an action plan of how Italy proposes turning the situation around. With the relationship becoming more fractious by the day, pressure is mounting on the Euro.

This week we have UK Average earnings data out on Tuesday, followed by CPI Inflation data on Wednesday which is expected at 2.5% slightly up from last month’s 2.4%. On Thursday we have UK Retail sales where improvement to 0.1% is expected after -0.8% was delivered the previous month.

In the US, the main data is inflation on Wednesday which is expected slightly higher as well as Retail Sales on Thursday which is again, expected to be slightly higher than the previous month.