LAST WEEK – KEY TAkeAWAYs
First UK rate rise in 10 years
As was widely expected, the Bank of England’s Monetary Policy Committee (MPC) raised interest rates for the first time since July 2007. The move from 0.25% to 0.5% reversed the cut that was put in place immediately following last year’s EU referendum. This shift in policy from the Bank, should not be a sign further rate hikes are imminent. Despite above target inflation, it is likely that the MPC will be cautious regarding the timing of future interest increases for fear of creating a negative impact on economic growth.
Another fresh high for the FTSE 100
Shares in the UK’s top 100 companies were not fazed by the rate rise with the FTSE 100 reaching another all-time high on Friday. The index hit 7,560, beating the previous end-of-day high of 7,556 on 12 October. Shares were boosted by buoyant sales across the services sector, which showed the economy remained resilient following the post-Brexit vote slump.
Trump gives nod to Powell for Fed role…
President Donald Trump nominated Jerome ‘Jay’ Powell to chair of the US central bank, the Federal Reserve (Fed). He will replace Janet Yellen, who will not get a second term in the job. The change is unlikely to upset markets, with Powell expected to adopt a framework of gradually normalising rates and reducing the Fed’s balance sheet.
…While Republicans unveil tax reforms
The US House of Representatives Republicans have delivered their 429-page bill which would bring in the largest overhaul of the tax system since the 1980s. The bill details a slashing of the corporate tax rate from 35% to 20%, as well as cuts for individuals and families and the ending of specific tax breaks. Trump called the Tax Cuts and Jobs Act legislation an “important step” toward tax relief for Americans.
Catalonia crisis rumbles on
Catalan pro-independence party Esquerra Republicana de Catalunya has said it will take part in a snap regional election on 21 December, in an admission that the previous ruling party in Catalonia has been fired and parliament dissolved. An arrest warrant has been issued for deposed Catalan leader Carles Puigdemont, who has sought refuge in Belgium.
Looking ahead - TALKING POINTS
Reporting season comes to a close
Analysts will be closely monitoring the end of the third-quarter global earnings season this week, giving a better picture of the health of corporates. Halfway through the reporting period, 77% of S&P 500 companies beat their earnings per share (EPS) estimates, 57% in Europe's Stoxx 600 and 62% in Japan's Topix, according to JPMorgan equity strategists. In all regions, earnings per share and sales growth is much higher for economically sensitive stocks than defensive sectors, while more of the former are beating estimates than defensives.
% of S&P 500 companies beating revenue and EPS estimates
Chinese data & Singles Day sales
Fresh economic data is due from China in the coming weeks. While the fanfare around last month’s Communist Party Congress presented a resilient and super-strong growth economy, China’s mounting debt remains worrisome. Many expect balance of trade data on Wednesday to widen to a $30bn-plus surplus, while consumer price index (CPI) inflation is anticipated to come in at around 1.7% year-on-year in October, up from 1.6% in September. According to a Reuters poll of economists, growth in factory output is seen slowing to 6.3% year-on-year in October from September’s 6.6%.
With Singles Day on 11 November there will also be important information on the health of domestic consumption. Singles Day is larger in absolutes retail sales terms than Thanksgiving, Black Friday and Cyber Monday
Chinese CPI inflation (%) – 10 years
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. Last week’s rate rise from the Bank of England was not a surprise, but was accompanied by minutes that painted a cautious picture on future interest rate increases due to the fragile nature of the economy and uncertainty over Brexit. Policy makers also omitted language from previous statements saying that more hikes could be needed than financial markets expect. This implies officials are comfortable with pricing for two more quarter-point increases, roughly one by late next year and another in 2020.
The Bank’s dovish tone on the future path of interest rates pushed bond yields lower, which is positive for UK gilt prices. It also hit the value of sterling and this is positive for global bonds and equities.
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