Weekly Market Update

17/09/2018

Last week prospects for US-China trade talks emerged and action by Turkey to support its currency fostered a positive mood. It also marked a decade since Lehman Brothers’ collapse, which thrust financial markets into free-fall and gave way to the longest bull run in history.

Discussions surrounding trade wars continued as US companies in China say they are already feeling the pain from the trade war. In a survey by two American chambers of commerce in China, almost two-thirds of US companies that responded said the waves of new tariffs had harmed their business.

The Turkish currency crisis took a dramatic turn last week as authorities abandoned their hostility to raising interest rates. After a year-long rout in the lira and with inflation running close to 18 per cent, the Central Bank of Turkey raised its benchmark rate by 6.25 per cent last Thursday, to 24 per cent. The effects of the decision were soon felt in the markets. The lira initially gained, and Turkish and other emerging market stocks rallied.

Argentina held its interest rates at 60 per cent, the highest in the world, following a surprise hike two weeks ago after the peso plunged. Russia raised its benchmark lending rate by 0.25 percentage points to 7.5 per cent, its first rate rise since December 2014. Inflation risks are mounting, with a slumping currency and threats of US sanctions.

The European Central Bank kept its interest rate policy unchanged as expected, staying on track to end bond purchases this year and raise interest rates next autumn. In a subtle shift, the ECB said it would halve its monthly bond purchases to €15bn from October, firming up its previous language, which said only that such a move was anticipated.

Bank of England governor Mark Carney extended his tenure until the end of January 2020, with the objective of supporting a smooth exit from Europe. The BoE left interest rates untouched at 0.75 per cent. Unemployment remains low and wages have outstripped inflation for four consecutive months, making a text book case for further increasing the base rate. But uncertainty around Brexit negotiations is causing the Bank of England to pursue a dovish policy, holding off on rising rates any time soon.

Brexit is never far from investors mind and there were several stories last week highlighting the negative effect of a no-deal outcome. Rating agency Moody’s warned a no-deal Brexit could tip the UK into recession, while Mark Carney warned the cabinet that a chaotic no-deal Brexit could crash house prices and send another financial shock through the economy.

There was however, some good news from the UK economy. At the start of last week, GDP growth came in at 0.6 per cent, the highest rate for more than a year. There was positive news from the jobs market too as wage growth accelerated in the three months to July, up to 2.9 per cent from 2.7 per cent for the three months to June.

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