Weekly Market Update

01/10/2018

A week of negotiations as UK Prime Minister Theresa May continued to argue that her Chequers blueprint for Brexit was the only credible proposal on the table, while distance talks from Labour raised the suggestion of a possible new referendum. Elsewhere Donald Trump and Japanese Prime Minister Shinzo Abe agreed to start trade talks in an arrangement that, for now, protected Japanese automakers from further tariffs, while Canada finally agreed to the new Nafta deal.

In the US, the Federal Reserve raised interest rates by quarter of a percent for the third time this year. Many members of its voting committee also expect another rise before the end of the year. Chair Jerome Powell stuck with his preference to let the data do the talking, but did highlight that US companies were beginning to get concerned over the escalation of trade wars even though they haven’t kicked into the numbers yet

The European Central Bank kept its policy unchanged, as expected, remaining on track to end bond purchases this year and raise interest rates next autumn. This was despite the fact the bank warned that risks from protectionism were gaining prominence.

Italian government bonds were hit last week after the country’s populist government agreed a more fiscally aggressive budget than was expected. The coalition decision agreed to approve a significant fiscal expansion to cover the guaranteed citizens’ income and their pledge for tax cuts which will see Italy’s budget deficit as a percentage of gross domestic product rise to 2.4 per cent next year. This is still within the 3 per cent of GDP deficit ceiling that EU countries must stick to as part of the bloc’s Stability and Growth pact, but Rome’s plan to run a 2.4 per cent deficit for several years will put Italy in clear breach of the part of the agreement that calls for members to bring debt down to 60 per cent of GDP.

Canada finally agreed to join a US deal with Mexico to revamp Nafta, ending months of uncertainty over trade in North America. The new trilateral pact is to be called the United States-Mexico-Canada Agreement. The fact that Canada joined the US deal with Mexico improves its chances of securing congressional approval in America, though it does not guarantee its passage. The trilateral deal is due to be signed on November 30, and would be voted on in 2019, with a new Congress. If the Democratic party wins control of the House of Representatives, this could complicate the deal’s prospects further down the line.

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