LAST WEEK – KEY TAKEAWAYS
UNITED STATES: SERVICES SECTOR AND LABOUR MARKET BOOST US ECONOMY
- Growth in activity in the US services sector, which accounts for 80% of US gross domestic product (GDP), expanded at its quickest rate in September since the Institute for Supply Management started measuring the data in 2008
- September’s non-farm payroll report fell short of forecasts, although August’s figure was revised up, wage growth remained elevated and unemployment hit its lowest level in nearly 50 years;
- Treasury yields jumped and US equities dipped as the positive outlook for the US economy increased the likelihood of the Federal Reserve continuing on its monetary policy tightening cycle;
- Omnis view: Despite simmering trade tensions, the underlying factors driving US economic growth appear strong, powered by President Trump’s tax cuts. We expect US equities to drift ahead of the midterm elections. Corporate earnings could act as a catalyst, with the direction of movement depending on whether they beat or miss forecasts.
GLOBAL TRADE: US AND CANADA REACH AGREEMENT, BUT NO PROGRESS WITH CHINA
- The US and Canada came to a last-minute agreement to overhaul their trilateral trade deal with Mexico, previously known as the North American Free Trade Agreement (NAFTA) but to be renamed the United States-Mexico-Canada Agreement;
- Equity markets in all three countries rallied in response to the positive conclusion of negotiations, while the Mexican peso and Canadian dollar strengthened against the US dollar;
- Omnis view: Concluding the trade deal with Canada and Mexico is good news for US President Donald Trump, but efforts to resolve the tensions with China, which have a greater impact on the health of the global economy, seem to have stalled. We do not expect a breakthrough with China ahead of the US midterm elections at the start of November.
EUROPE: UNCERTAINTY LINGERS ABOUT ITALIAN BUDGET
- Italian bond yields rose and the euro weakened against the US dollar over concerns about the Italian coalition government’s u-turn on fiscal spending in its upcoming budget;
- Italy’s Economy Minister Giovanni Tria tried to defuse tensions with the EU by arguing that higher economic growth would help manage the budget deficit;
- Italian assets rebounded modestly when Tria subsequently announced the country would gradually reduce its budget deficit from 2020, rather than keep it at 2.4% as proposed in the outline published at the end of September;
- Omnis view: While the Italian Economy Minister sought to reassure markets, there still seem to be divisions within the coalition regarding its fiscal spending policy. Italy must submit its draft budget to the EU by the middle of October, and volatility may continue in the bond and currency markets in the meantime.
EMERGING MARKETS: US LEADERSHIP WEIGHS ON EM ASSETS
- The Indonesian rupiah weakened to a multi-year low against the US dollar after recent inflation data fell short of forecasts, compelling central bank Governor Perry Warjiyo to claim the country must raise interest rates ahead of the US to avoid capital outflows;
- The Indian rupee hit a record low against the US dollar despite efforts by the government to support the currency by increasing tariffs on a range of imports, while the country’s central bank caught markets by surprise by deciding to leave interest rates unchanged;
- Omnis view: A strong US economy and currency and the prospect of higher interest rates have dented sentiment towards emerging markets (EMs) and weighed on the region’s equities. However, we do not foresee these headwinds affecting the sector for the length of the cycle.
COMMODITIES: HIGHER OIL PRICE BOTH A BENEFIT AND A BURDEN
- The price of oil rose above $85 a barrel for the first time in four years, as concerns mounted about a fall in supply due to American sanctions on Iran and disruption to production in Venezuela;
- Omnis view: More expensive oil may be having an increasing influence on the energy-heavy FTSE100, but it could also raise the pressure on developing countries like China and India that rely heavily on imports to drive their economies.
LOOKING AHEAD – TALKING POINTS
ECONOMIC DATA: US INFLATION, CHINESE TRADE DATA AND UK GDP TO BE RELEASED
- The UK’s monthly GDP figure for August will be released on Wednesday;
- US inflation is forecasted to remain flat when September’s annualised figure is published on Thursday;
- China releases data on exports, imports and balance of trade on Friday;
- Omnis view: If US inflation stays elevated, as widely expected, then the likelihood remains high of the Fed continuing with the upward trajectory of interest rates. Meanwhile, the markets will closely monitor Chinese trade data for any indication of the impact of US tariffs.
CORPORATE EARNINGS: US BANKS TO REPORT ON FRIDAY
- Corporate earnings season continues, as some of the big names in US finance, including JP Morgan, Wells Fargo and Citigroup, publish results on Friday;
- Omnis view: Earnings season gets underway properly once the banks start reporting, so we will have a better indication of the outlook by the end of the week.
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