Weekly Market Update

21/10/2019

After Saturday’s defeat Boris Johnson will make another attempt this week to win parliament’s backing for his Brexit deal. Although markets have been sanguine so far, the real impact has been on the currency which has recently strengthened providing a headwind to those overseas earners. Of course, it’s worth reminding ourselves that the past 3 years has only been about agreeing the divorce. The legal Brexit, on 31 October (or another date in the future) is just the start of the process. Only after Brexit can the challenge of negotiating a new relationship and trading agreement begin.

The US and China reached phase one of a trade agreement last Friday although the euphoria was short lived given the deal is not binding and contains only vague promises. The mood was dampened further when it emerged China wanted more talks before agreeing to what President Trump called a substantial agreement. For the moment, the US has agreed to suspend the increase from 25 per cent to 30 per cent on $250bn of Chinese goods due to kick in this week while China agreed to make agricultural purchases as well as modest concessions on access to financial markets and intellectual property theft.

The UK employment data was slightly weaker than expected, with unemployment climbing to 3.9 per cent and wage growth slowing to 3.8 per cent year-on-year. Both UK and US retail sales missed expectations in September though remain solid on year-on-year. The recent weakness in spending, alongside the contraction in the manufacturing sector, pose a threat the longest US economic expansion on record.

China published growth data for the third quarter. A growth rate of 6 per cent was slightly below expectations and the weakest level for almost 30 years. The underlying data held up slightly better than expected, with industrial production and retail sales ahead of expectations.

We also learned more of the US Federal Reserve’s plans to increase their balance sheet to underpin the workings of the financial system and money markets through purchasing short term Treasury Bills to the tune of $60bn a month until the end of the second quarter next year. Whilst the Fed is adamant this is very different to QE, the growth in their balance sheet over the next six months will certainly not be a headwind for financial assets. With QE starting again in the eurozone next month, and a form of QE in the US as well, there will be plenty of liquidity going into markets for some time to come.

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