LAST WEEK – KEY TAKEAWAYS
MARKETS: EQUITIES RATTLED BY TIGHTENING MONETARY CONDITIONS
• US equities fell to their lowest level in eight months on Wednesday, and Asian and European equities followed them down on Thursday;
• One of the main catalysts for the sell-off was concerns that rising interest rates could slow economic growth, with the tech sector among the hardest hit;
• US equities staged a tentative rally on Friday, as the tech sector rebounded, although financials lagged despite strong third-quarter earnings from several investment banks (see ‘Corporate earnings’);
• Omnis view: US President Donald Trump blamed the Federal Reserve for this correction, but his tax cuts have contributed to the thriving US economy which the Fed is trying to keep under control by tightening monetary policy. Nevertheless, the markets are starting to accept the upward trajectory of interest rates.
UK: RHETORIC SOFTENS AS DEADLINE APPROACHES FOR WITHDRAWAL DEAL
• Sterling rallied on Tuesday as rumours circulated that the UK and the EU could agree a withdrawal deal in a matter of days;
• According to reports, the two sides made significant progress on a potential solution to avoid a hard border in Ireland;
• Omnis view: Rhetoric seems to be easing as we approach the deadline to secure a deal, which markets welcomed. There is still a lot of negotiating ahead, so we would not expect a deal until close to the deadline.
CHINA: ARE TRADE TARIFFS STARTING TO TAKE EFFECT?
• Chinese equities slipped as the People’s Bank of China responded to weak investment and manufacturing data by reducing reserve requirement ratios in an effort to boost liquidity in its banking sector;
• Omnis view: It is unlikely the current tariffs will be enough to force Beijing to the negotiating table. We do not expect the two sides to make progress ahead of the US midterm elections at the start of November, although President Trump may increase the pressure on China via further announcements.
EUROPE: ITALIAN BOND MARKET VOLATILE AS BUDGET DEADLINE LOOMS
• Yields on Italian government bonds hit a four-year high as deputy Prime Minister Matteo Salvini aggravated tensions over the coalition’s upcoming budget by accusing EU officials of being ‘enemies of Europe’;
• Omnis view: The EU’s deadline for Italy’s draft budget is today, and the prospect of further volatility in the country’s assets depends on the fiscal spending plans submitted by the coalition government.
EMERGING MARKETS: BOLSONARO WINS FIRST ROUND OF BRAZILIAN PRESIDENTIAL ELECTION
• Brazilian assets rallied as far-right candidate Jair Bolsonaro triumphed in the first round of Brazil’s presidential election;
• Bolsonaro will face leftist opponent Fernando Haddad of the Workers’ party in the second round of the election at the end of October;
• Emerging market (EM) equities were dragged down by the negative sentiment around developed markets, but they recovered before the end of the week;
• Omnis view: Putting Bolsonaro’s politics to one side, political stability in one of the biggest EM economies should improve sentiment to the sector as a whole.
CORPORATE EARNINGS: US BANKS BEAT EXPECTATIONS
• JP Morgan, America’s biggest bank, beat forecasts when it reported its third-quarter results on Friday, boosted by strong performance in consumer banking;
• Wells Fargo and Citigroup also exceeded analyst expectations in the latest quarter;
• Omnis view: Financials set the tone for earnings season, so Friday’s results look promising. However, concerns about rising interest rates- as demonstrated last week- could temper the impact on equity markets.
COMMODITIES: DROP IN OIL PRICES WEIGHS ON EQUITIES
• Oil prices hit a four-year high of over $86 on Wednesday before concerns about weaker demand dragged them below $80, as the International Monetary Fund lowered its global economic growth forecasts for 2018 and 2019;
• Gold rallied as investors headed for what are traditionally considered safe haven assets amid the market volatility;
• Omnis view: Falling prices put further pressure on equities, particularly the energy-heavy FTSE100, although emerging markets like China and India should welcome cheaper oil.
LOOKING AHEAD – TALKING POINTS
ECONOMIC DATA: UK, CHINA AND JAPAN TO PUBLISH INFLATION FIGURES
• The UK announces August’s unemployment rate on Tuesday followed by September’s inflation figure on Wednesday;
• China releases September’s annual inflation data on Tuesday and its third-quarter gross domestic product (GDP) growth rate on Friday;
• Japan publishes September’s balance of trade data on Thursday and September’s inflation data on Friday;
• Omnis view: China’s GDP growth rate may provide some indication of the effect of trade tariffs on the country’s economy.
POLITICS: ITALY AND BREXIT TOP THE EUROPEAN POLITICAL AGENDA
• The Italian coalition government must submit the draft proposal for its 2019 budget to the EU today;
• The European Commission summit takes place on Thursday, where leaders hope to draft a political declaration covering the future relationship between the UK and EU;
• Omnis view: The markets will closely monitor events in Europe for any potential effect on the region’s bonds and currencies, while the rhetoric coming from the EU leaders’ summit could impact UK assets.
COMPANIES: ANOTHER BUSY WEEK FOR CORPORATE EARNINGS
• Financials dominate reporting season again this week, with Goldman Sachs, Morgan Stanley and Bank of New York Mellon set to publish third-quarter results;
• Omnis view: Following last week’s correction, markets may look to corporate earnings for a catalyst to help global equities rebound.