LAST WEEK – KEY TAkeAWAYs
Merkel victorious, but right-wing surge shocks Germans
Chancellor Angela Merkel’s Christian Democrats gained most votes in Sunday’s German election, but the biggest story was the gains made by the right-wing populist party, Alternative for Germany. Merkel now faces a period of complex negotiations in order to form a coalition government, which could be a three-way union with the Free Democrats and the Greens.
May calls for Brexit implementation period
Prime minister Theresa May used Friday’s speech in Florence to call for an implantation period of around two years after the March 2019 departure date for the UK to complete its withdrawal from the EU. The UK would remain within the EU’s single market and some form of customs union until a full exit from the union in 2021, she said.
US Fed calls time on QE…
The US central bank, the Federal Reserve (Fed), has said it plans to start ‘normalising’ the country’s balance sheet next month, unwinding its $4.5trn quantitative easing plan. This represents the beginning of a new era for the Fed which, since 2008, has been buying US treasuries and mortgage-backed securities to prop up the slow-recovering economy. At its Wednesday meeting, the bank kept interest rates on hold but said it will consider a further rise before the end of the year.
… but dollar rally fails to last the pace
The Fed’s statement unsurprisingly lifted the dollar, which hit a two-month high against the yen at around ¥112.7. However, as the week went on, further posturing between president Trump and North Korea pulled the greenback down to as low as ¥111.6. The yen often strengthens during times of turmoil, given Japan’s status as a creditor and the expectation that Japanese investors would repatriate assets in a crisis.
UK government borrowing at lowest point since 2007
UK public sector borrowing is at its lowest level since the financial crisis, according to data from the Office of National Statistics (ONS). Net borrowing in August was £5.7bn, much lower than was forecasted. For the financial year to date, borrowing stood at £28.3bn, which was the lowest amount for the five-month period since 2007. This has led to speculation that chancellor Philip Hammond may ease austerity measures in his November budget.
Looking ahead - TALKING POINTS
China’s leaders ready for a reshuffle
With the German election out of the way, investors and economists have turned their attentions to China and next month’s 19th Party Congress. S&P Global Ratings has set the ball rolling with its decision late last week to cut the country’s sovereign credit rating from AA- to A+, citing the risks from soaring debt. S&P said that while credit growth had contributed to real gross domestic product growth and higher asset prices, it had also “diminished financial stability” within the country. China’s total borrowing has grown sharply in recent years and now equates to around 260% of the annual economic output.
The Party Congress, a twice-a-decade leadership reshuffle, could bring about shifts in foreign policy, particularly given the current standoff between North Korea and the US, and ongoing territorial disputes in the South China Sea. President Xi Jinping has reportedly called for economic and political stability to be an absolute principle that needs to be dealt with using “strong hands”.
China's total borrowing
Source: Bloomberg Intelligence
Will investors buy into retail data?
Retail sales data – an excellent gauge of consumer confidence – is due next week from major economies such as Japan and Germany. The latest index figure on consumer confidence in the US will also be published on Tuesday, along with new home sales and data on jobless claims and personal spending.
The election aside, Germany is one country enjoying something of a consumer boom, driven by record-high employment, rising wages and low borrowing costs. While the economy weakened slightly this summer after a strong first half to the year, the Finance Ministry last week predicted further solid growth before the latest GPD data is released.
Figures released on Friday showed Germany’s private sector economy ended the third quarter strongly, with business activity growth accelerating to the fastest in almost six-and-a-half years, according to purchasing managers’ index (PMI) survey data from IHS Markit.
HIS Markit Germany Flash PMI
Source: Statistisches Bundesamt, IHS Markit
THE OMNIS VIEW
Through a well-diversified approach to asset allocation, the Omnis investment team aims to defend and grow the value of your portfolio through market cycles.
Whether it be Theresa May’s proclamations on Brexit, Angela Merkel’s efforts to form the new German government, or Emmanuel Macron’s struggles in the French Senate elections, investors want signs of confidence and stability from Europe’s leaders.
The Omnis Managed Portfolio Service remains overweight Europe ex-UK on the belief that markets should continue to grind upwards given the eurozone economic recovery is gathering pace and broadening beyond the core economies of northern Europe. So far, this has proven to be the right call.
Omnis Investments does not provide investment advice. This material is for information only and does not constitute an offer or solicitation of an order to buy or sell any securities or other financial instruments. Any opinions expressed are made as at the date of publication but subject to change. Information obtained from external sources is believed to be reliable but its accuracy is not guaranteed. The value of investments and any income from them can go down as well as up and you may not get back the original amount invested. Past performance is not a guide to future performance and should not be relied upon. Always seek professional advice before acting.