Duncan Donald

Mon, Nov 26

Weekly Markets Update - 26/11/2018

Despite it being a week of global holidays, last week was certainly an interesting and volatile week across all asset classes. 

In the UK, we did see major developments in the Brexit situation as PM Theresa May agreed Brexit terms with the EU. This was first rumoured late last week, then formally agreed following the weekend’s UK/EU Brexit talks. The negotiations also showed progress on a solution for Gibraltar.  Naturally, this could be seen as positive step for the UK but with Theresa May now having to go back to parliament and pass agreement via a vote, optimism is limited.  Swiftly after the initial rumours of a deal last week, we saw the pound surge from 1.2780 to 1.2930, but as spokesmen for the DUP, SNP and Labour Party all confirmed they would not vote from the agreed deal, those gains were quickly reversed. After confirmation of the UK/EU deal over the weekend, the move in the pound perfectly mirrored the positive wave followed by pullback.  Early polls of voting in parliament show that the PM will struggle to obtain the required votes to pass the deal, potentially leaving us with a leadership battle which will only hinder the process. 

The European Commission rejected the second Italian budget attempt which could trigger the EU’s excessive deficit procedure, a legal disciplinary action that can be brought against countries that breach the Eurozone's debt threshold. To action the procedure, the Commission needs to get approval from all EU members finance ministers unless an alternative solution is found at their next meeting in January. Should the vote for this pass, Italy will be issued with a new deadline to amend its budget within 3 to 6 months. It is only after this if Italy fails to comply, the European Commission can apply financial sanctions which can include 0.2% of the GDP or cuts to EU subsidies. The Deputy Prime Minister Luigi di Maio suggested that Italy does not want to cause a war with European Union and that Italy is opened for negotiations if the main points of the budget are not changed.

Oil traded back down towards the lows at $50 per barrel, the lowest level since February 2017. The main drivers being oversupply from the US and Russia and concerns over the economic outlook weighted heavily. On Wednesday the Organisation for Economic Co-operation and Development (OECD) said it has cut the global economic outlook for 2019 from 3.7% to 3.5% and warned that if the Trump Administration increases tariffs to 25%, as threatened, economic growth could fall to 3% by 2020. 

All equity indices suffered heavy losses as global concerns continued creating a significant pullback on the year.  The US S&P 500 ended the week in correction mode, down more than 10% from its September 20th peak and retesting the lows recorded at the end of October. FAANG stocks (Facebook, Apple, Amazon, Netflix and Alphabet’s Google) have weighted on the performance of the both S&P 500 and Nasdaq Composite. The biggest contributor was tech giant Apple (AAPL), the company lost more than 10% in value over the shortened week, 25% lower than the height of the stock seen in just October. The violent reaction came following several smartphone components suppliers cutting their revenue outlook citing reduced demand from a “large customer”, namely Apple.

In the week ahead, we’ll be hearing from numerous central bankers Mark Carney of the MPC and Mario Draghi of the ECB on Monday. Wednesday brings potentially the greatest volatility with the US Prelim GDP data, which a slightly increase is expected from 3.5% to 3.6%.  Then on Thursday, the Federal Reserve will be publishing the minutes of their November interest rate decision meeting where we look to get an insight into their thoughts on the pace of the US interest rate path.

Have a great week.