Investors appeared increasingly nervous last week regarding the sustainability of the recent market rally, in the absence of any significant progress on the tax reform in the US.
Donald Trump’s pledge to implement large corporate tax cuts had helped encourage the rally in recent weeks, but competing plans outlined by House and Senate Republicans highlighted the uncertainty hanging over the reform efforts. However, investors continue to buy on the dips and reported earnings are robust, providing encouragement that equity markets have further to go.
The political risk spotlight swung largely away from North Korea and towards the Middle East. Fears of a wider regional confrontation have grown after an anti-corruption drive by Saudi Arabia which has seen over $800bn of assets frozen.
The arrest of senior Saudi Arabian officials has been seen as consolidating power for Mohammad bin Salman, who supports extending Opec-led output cuts. In addition, a missile was fired from Yemen at Riyadh that the Saudis have blamed on Iran. Meanwhile, the price of oil moved higher, while bond and CDS markets priced in escalating risk.
Political turmoil was also the keynote of the week in the UK, where Priti Patel was forced to resign as Secretary of State for International Development, after it was disclosed that she had held unauthorised meetings with Israeli officials while on holiday. Penny Mordaunt replaced her, with many observers noting that the replacement of one ardent Brexiteer with another was necessary to preserve the delicate balance of the Cabinet.
The stability of the government is a growing concern for investors, given its implications for progress in the Brexit negotiations. Over the weekend a group of Conservative members of parliament had agreed to sign a letter of no-confidence in Theresa May, UK prime minister, causing downward pressure on sterling.
Behind the political headlines, there was good news for UK manufacturing. Industrial production rose a larger-than-expected 0.7 per cent in September, with output increasing across most manufacturing sectors, except for construction which fell the most in 18 months. The UK trade deficit also narrowed in September from the previous month, driven by an increase in goods exports.