Weekly Market Update

20/11/2017

Investors seem to regain their appetite for risk at the end of last week following global declines in stocks and high-yield credit. A sense of cautious optimism returned to markets, as commodity stocks regained their poise, helping indices bounce higher. But concern about high valuations is lingering and investors remain on watch for a renewed catalyst to take the rally meaningfully higher.

Overall, global growth remains resilient and earnings forecasts strong, despite uncertainty surrounding the U.S. tax overhaul, the path for China’s economy, and Brexit.

UK inflation remained steady in October at 3 per cent, despite higher food prices. Wage growth in the UK remains below the level of inflation, suggesting that consumers will continue to feel the pinch. The inflation data combined with UK political uncertainty over Brexit drove sterling down against the euro.

The single currency also benefited from news of Germany’s continued recovery, with strong exports responsible for the country’s economy expanding 0.8 per cent in the third quarter.

German coalition talks appeared to collapse as the FDP pulled out of negotiations, leaving political uncertainty and the prospect of fresh elections. Ultimately Merkel can try to form a coalition with another party or risk calling fresh elections to gain an upper hand, in the mist of Brexit talks. The latter of course had negative consequences for the Conservatives in the UK, who took the gamble which failed to strengthen their hand.

The Japanese economy grew at an annualised pace of 1.4 per cent in the third quarter, notching up its seventh-consecutive quarter of growth. Growth suggests that prime minister Shinzo Abe’s economic policies are on track to create inflation eventually as the economy runs out of spare capacity. However, Abe has already called upon companies to raise wages 3 per cent in next year’s annual wage round to boost consumer spending power, which has continued to be relatively flat.

Despite the rapid rise to cleaner fuels, there are concerns about a glut in the oil supply over the years to come. The International Energy Agency (IEA) said that by 2025, the US would be producing as much oil as Saudi Arabia, meaning it will become a net exporter of fossil fuels. The agency said that its estimate of recoverable shale oil in the US had increased by 30 per cent. The news had negative implications for the oil price, with Energy stocks being the worst performers at the sector level in both the UK and the US.

Venezuela suffered defaults on more than $60bn of international bonds after missing several interest payments. It missed a deadline to make $200m in interest payments on two of its government bonds, spurring S&P to formally declare the default. Caracas is already overdue on another $420m of interest payments on other sovereign bonds, which will also soon be in default, as will payments on debt from PDVSA, the state oil company.

 

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