Weekly Market Update

23/10/2017

Spanish Prime Minister Mariano Rajoy triggered the process to take direct control of the Catalan administration, suspending their regional autonomy by using Article 155 of the Spanish Constitution. The prime minister later indicated that the entire Catalan government would be sacked whilst calling for new regional elections within six months.

This political uncertainty has the potential to cause considerable economic disruption. Around 700 companies including many banks have moved their headquarters out of Catalonia since the referendum. Tourism to the region is falling, and the growth impact will likely be felt in the months ahead.

The US dollar strengthened as the Senate passed a budget blueprint that will help push forward the Republican party’s planned $1.5tn tax-cut package. Lawmakers voted 51 to 49 in favour of a resolution that should open the path to tax legislation without the need for Democratic party support. Key Republican initiatives including a proposed overhaul of the US healthcare system have foundered this year, and officials are looking to the tax reform to energise their prospects in mid-term elections. Any failure from here could have ramifications for highly valued markets.

The Japanese Prime Minister Shinzo Abe won a sweeping election victory and a historic third term in office. The ruling Liberal Democratic party-led coalition secured a two-thirds parliamentary majority that gave Abe a fresh mandate for Abenomics and the chance to pursue his personal priority of revising Japan’s post-war constitution. The victory means further fiscal stimulus and the ability to amend the constitution to recognise the legality of Japan’s armed forces.

China’s economy grew at 6.8 per cent in the third quarter year on year, slightly below the previous period but still above the government’s full-year target, boosting President Xi Jinping’s effort to consolidate power at a five-yearly Communist party congress. The economy benefited from the lagging impact of significant monetary and fiscal stimulus in 2016. That stimulus boosted short-term growth but added to long-term risks from reliance on debt-fuelled investment.

In the UK, retail sales dropped 0.8 per cent from August compared with the 0.1 per cent expected by economists, leaving growth in the third quarter at its weakest for four years. Employment in the UK showed a continuing trend of job creation while wages rose by 2.2 per cent. In addition, inflation in the UK rose to 3 per cent in September, its highest level for half a decade. But the persistent weakness in wage growth, despite high inflation, suggests that the predicted November rate rise may have limited traction.

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