Weekly Market Update

22/10/2018

Global developed markets mounted a recovery at the beginning of last week. Strong US company earnings played a major role, with around 90 per cent of companies beating analyst estimates. However, it was geopolitics that was the main focus. China reported its slowest quarterly growth in a decade and there was much controversy after Saudi Arabia was accused of murdering a dissident journalist.

The S&P 500 oscillated furiously after the release of the Fed’s September meeting minutes. Policymakers showed agreement on the September hike in defiance of sharp criticism from US President Donald Trump. There was general anticipation that further gradual increases would be consistent with the economic expansion, labour market strength, and firm inflation that most forecast.

There was however some criticism over Donald Trump’s tax cuts, as the US deficit has soared 17 per cent to $779 billion in the year to April 2018. This is the highest level since 2012. Corporate tax receipts fell 22 per cent and spending rose 3 per cent. As a result, the president said he had instructed federal department heads to slash 5 per cent from their budgets next year.

In the UK, inflation dropped further than expected with the consumer price index falling to 2.4 per cent in September, from 2.7 per cent the previous month. However, wages were reported to have grown at their fastest pace since the global financial crisis. For the three months to the end of August, wage growth came in at 3.1 per cent. The pound strengthened on the news, although this initially constrained the FTSE 100’s participation in the developed-market rally.

But as so often recently, the pound fell back after the Brexit talks reached a fresh impasse. The UK and the European Union have been struggling to find a way forward on the Irish border question, putting the prospect of an exit deal at risk. Meanwhile, Theresa May faces growing criticism at home for her handling of the negotiations. Her suggestion that a longer transition period could be adopted met widespread hostility among politicians from all sides.

In China, the economy grew by 6.5 per cent in the third quarter, the slowest rate since the depths of the financial crisis in the first quarter of 2009. News that unreported Chinese local government debt may amount to trillions of US dollars spooked investors and the Shanghai Stock Exchange extended previous losses.

Many other emerging markets were also weak, but Brazil bucked the trend as hopes that Jair Bolsonsaro, the right-wing candidate, would win the final round of the presidential election on 28 October. Although Bolsonaro is a controversial figure, his economic policies are seen as market-friendly.

Finally, rating agency Moody’s announced that it cut Italy’s debt rating by only one notch, leaving it above junk status. This result was better than feared providing some short-term relief to falling bond prices. However, Italy’s deputy prime minister Luigi Di Maio has insisted that the government has no plans to change its budget blueprint, which will likely hinder any positive momentum from the rally, as they battle with Brussels over their budgetary plans.

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