Duncan Donald

Mon, Dec 3

Weekly Markets Update - 03/12/2018

Over the past weekend, we saw potentially positive developments in the US-Sino trade war with Trump able to free up more time following the cancellation of his meeting with Russia’s Vladimir Putin.  He entertained China’s President Xi for the first time in one year.  Ahead of the meeting, the US had scheduled tariffs on $200bln of Chinese goods to rise from 10% to 25% effective from the first day of the New Year. With concerns that these significant increases could lead to a decline of 0.9% on China’s GDP, they posed a serious threat to their economy.

On face value, the meeting went well with both countries agreeing to pause any additional tariffs or sanctions for 90 days for the facilitation of negotiations in the best interest of both parties.  This pause and verbal commitment to progress has been heralded by both parties as positive progression. Both can return to their countries with the claim they are leading the negotiations for the benefit of their own economies. However, the markets reaction tends to tell us the realistic assumption of the progress made.  We have seen a significant positive move in stocks and a shift away from safe haven assets on Sunday evening at the Asian open.  With the Japanese Yen, Swiss Franc and gold being sold, the move however could potentially be limited.  The reason being is scepticism on both parties to realistically adhere to the terms of the truce when not facing each other in the same room. Trump has a long history of changing his mind and now that these progressive steps have been taken, should we see any slight contradiction of agreement, it could significantly escalate the tensions.  

In general, last week started on quite a positive note. This came following the approval of the Brexit plan by the European leaders, positive footfall and online sales following the US holidays and Black Friday and Cyber Monday. We also had the news that the Italian Government finally expressed desire to work with the European Union to reduce the deficit within agreed levels.

Last week’s major market event was the FOMC Minutes from the October meeting and speech from Federal Reserve Chairman Jerome Powel.  During his speech at the Economic Club of New York, Powell said that interest rates are still “low by historical standards but remain just below the broad range of estimates of the level that would be neutral for the economy”. This was perceived as a more dovish tone relative to his remarks in October that were indicating that rates are “a long way” from neutral.  Fed minutes came to confirm the more dovish tone as members were concerned about the timing of the next rate hikes. It was suggested that further post meeting statements to be altered to remove the reference to “further gradual increases”. The Committee observed that growth in the business fixed investment slowed in the third quarter. The markets were expecting that the Committee could highlight the markets sell off in their statement, but instead the most frequently mentioned items were debt and trade war concerns weighing on economic growth.  

The shift in tone and sentiment will be music to the ears of Donald Trump who has been critical of Jerome Powell and the Federal Reserve’s speed of interest rate appreciation. This change of pace from the FOMC has the market now looking at 1 to 2 additional hikes from the original 2 to 3 the market was pricing in just a few months ago. Jerome Powell has committed to news conferences after every monthly interest rate setting meeting in 2019, historically this has only happened every quarter and typically the market has become used to only seeing dates supported by conferences as “in play” for rate movement. So, we could see things going two ways with this; it can either give Powell a greater scope to give the market continuous forward guidance or create greater volatility as rate rises could be less telegraphed.

The already fractious relationship between Russia and Ukraine, has deteriorated further when Russia has seized three Ukrainian Navy vessels and their 24 crew members in the Kerch Strait last weekend. The Ukraine have introduced martial law and requested NATO to deploy warships in the area. President Trump using his favourite medium for official communication, “the twitter account”, indicated that his meeting with president Putin during the G-20 summit will be cancelled following the developments in Ukraine. The Russian administration have not been formally informed about this decision.

It was a good week for US and global equities fuelled by US sales figures and the Federal Reserve’s more dovish tone. We saw the S&P 500 returning above 4% and Nasdaq composite above 5% and the 10 Year Government Bond yield at 3.01% down from 3.23% level recorded in November 08.

In the UK, the week started on a positive note following the EU agreement of the Brexit plan. PM Theresa May engaged in a campaign to lobby the approved Brexit plan to both fellow colleagues as well as the public. Naturally, this could well be the hardest job she will face over the whole Brexit negotiation. We know Labour and the Scottish Nationalist Party will voter against the deal and more worryingly for the PM, neither will the DUP and dissenters in her own party. Parliament will have the vote on the deal after 5 days of debates on December 11th. In the meantime, the European Court will have to rule on an emergency legal challenge on whether article 50 can be reversed unilaterally by the UK. Ideas about a second referendum have been vehiculated over the period as an option in case the deal fails to be passed by the Parliament.

On Wednesday, the UK Government published the analysis that outlines the costs associated with a range of Brexit scenarios, even though the precise impact of the deal PM Theresa May has negotiated with the EU has not been exactly measured.  All scenarios point to a potential economic slowdown relative to remaining inside the EU.  Hours after the report was made public, the BOE Governor Mark Carney has cautioned that a no-deal Brexit may be worse for the UK economy than the financial crisis but only in the worst-case scenario and quoted “not what’s most likely to happen”.

The Pound Sterling moved into a range between 1.273 and 1.284. and generated a positive return on Wednesday on the back of a more dovish comments from the Federal Reserve. The FTSE 100 ended a week with a positive return but lost some of the gains made earlier in the week.

The EU Governments’ representatives in the Economic and Financial Committee on Thursday backed a disciplinary move against Italy a day after Italian Economy Minister Giovanni Tria said his government was looking for ways to contain public spending while supporting economic growth. The EFC move was largely expected and procedural and allows the EU executive Commission to recommend the formal opening of the disciplinary procedure.  The ECB President Draghi has confirmed the bank’s plans to end the 2.6 trillion-Euro bond purchase with the decision being formalised at the meeting on December 13. He also suggested that the inflation might rise slower than previously expected, affirmation that seems to be confirmed by Eurostat’s preliminary CPI data that showed a 2% annual increase in inflation at the aggregate and a 1% at the Core level.  

This week we see interest rate decisions from the Central Banks of Australia on Tuesday and Canada on Wednesday. Both are expected to remain unchanged at 1.50 in Australia and 1.75% in Canada with the market looking for any future guidance for direction.  After last weeks shift in tone, any speakers from the Fed will be closely watched, with Clarida, Quarles and Williams late on Monday and Powell himself on Wednesday. At the end of the week we have US employment data with headline Non-Farm Payrolls expected at 200k following on from a big surge the previous month at 250k. The unemployment rate is forecast to hold firm at 3.7% with a slight upwards improvement in Average Earnings from 0.2% to 0.3%

Have a great week.