Weekly Market Update

29/10/2018

Global confidence took a further downward step last week as panic selling continued. Weaker than expected corporate earnings was one such catalyst while positive US data reinforcing the US Federal Reserve’s direction of travel on interest rates was another.

Third quarter results from Amazon and Alphabet were disappointing. Until recently, the technology sector seemed to have a degree of immunity to anaemic sentiment about global growth. However, fears about the corporate profits and continuing global trade tensions has rocked investor sentiment. Since its peak on October 3, the Nasdaq Composite Index has now fallen by around 9 per cent. The global sell-off also resulted in Brent crude oil dipping below $76, with fear and anxiety about the global economy proving to play a bigger role in the oil price than the fundamentals of supply and demand.

The US economy slowed less than expected in the third quarter, with GDP rising 3.5 per cent year-on-year, above expectations. Investors have become increasingly concerned that most major central banks will continue to wind down their crisis-era stimulus programmes despite signs economies outside the US are slowing with mounting trade tensions threatening to do further damage.

The European Central Bank (ECB) left its interest rates and its forward guidance unchanged for a third consecutive policy session. The bank also confirmed that its asset purchase programme would end in December. The Governing Council expects the key ECB interest rates to remain at their present levels at least through the summer of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2 per cent over the medium term.

The European Commission demanded changes to Italy’s budget as it expressed concerns about the impact of higher spending on already high levels of debt in the country. Italy’s governing populist parties have vowed to push ahead with campaign promises including a minimum income for the unemployed. The country now has three weeks to submit a new, draft budget to Brussels.

Brazilian Jair Bolsonaro clinched victory in presidential elections on Sunday, ushering in the first far-right administration in Latin America’s largest country since its military dictatorship ended more than three decades ago. The promises of economic reform will face challenges in a country that is still struggling to emerge from recession and dealing with a Congress that is divided among 30 parties, and the large mass of the electorate that did not vote.

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