MARKET UPDATE: BREXIT UNCERTAINTY RETURNS AS US EQUITIES STEM LOSSES

MARKET UPDATE: BREXIT UNCERTAINTY RETURNS AS US EQUITIES STEM LOSSES

22nd October 2018

LAST WEEK – KEY TAKEAWAYS

UK: Mixed week for sterling as Brexit uncertainty resurfaces

• Sterling weakened at the start of the week following Brexit Minister Dominic Raab’s one-hour meeting with Michel Barnier, the EU’s chief negotiator;
• Raab told Barnier that the UK could not agree to the withdrawal deal at the EU leader’s summit on Thursday, and the talks ended in stalemate;
• Sterling rallied later in the week as data released by the Office for National Statistics showed wages grew at the fastest pace since the financial crisis in the three months to the end of August;
• Omnis view: Brexit-related uncertainty appears to have returned. European leaders cancelled a special Brexit summit planned for November, putting pressure back on Mrs May to come up with a solution acceptable to both her own party and the EU.

US: Tech sector helps equities stem losses

• US equities regained some of the ground lost in the recent sell-off, driven by a tech sector rally and upbeat corporate earnings (see ‘Corporate earnings’ below);
• The US dollar softened as September’s retail sales data missed expectations, but it recovered after the release of the minutes from the latest Federal Reserve meeting, which hinted interest rates would hit 3% by the end of 2019;
• Omnis view: As the stock market corrected due to concerns over rising rates, the tech sector emphasised its influence by leading the markets down and back up again. Third-quarter corporate results could dictate the trajectory of US equities in the coming months, though upcoming mid-term elections add an element of uncertainty to the outlook.

Europe: Tensions over Italian budget set to continue

• Italian assets rallied as the country’s coalition government submitted its draft budget, including proposals to increase fiscal spending, to the EU ahead of the deadline on Monday;
• Brussels’ rebuke led to a couple of days of volatility, but Italian assets rallied again as Pierre Moscovici, the EU Economic Commissioner, sought to defuse tensions by claiming he wanted to ‘maintain a constructive dialogue’ with the country’s government;
• Omnis view: Despite the conciliatory comments from Moscovici, market turbulence could continue as the Italian coalition, which may struggle to agree on its next steps due to internal divisions, is unlikely to back down.

China: the delicate balancing act continues

• Despite data showing that China’s economic growth slowed in the third quarter, equities rallied as the country’s regulators said they were ready to implement measures to support the economy;
• The renminbi fell to its lowest level against the US dollar since the start of 2017, although the US Treasury declined to label China a currency manipulator;
• Omnis view: The Chinese authorities have been trying to address concerns over the amount and quality of debt in the economy. While these efforts were expected to slow the economy, the imposition of trade tariffs has made the balance more fragile.

Corporate earnings: Encouraging start as markets await FAANGS

• Goldman Sachs and Morgan Stanley maintained the good run of third-quarter results for the financial sector as both beat forecasts;
• Shares in Netflix, the first of the FAANG group of tech stocks to announce earnings, jumped as the company reported strong subscriber growth;
• Omnis view: Results so far have generally been encouraging, but it is early days yet. Considering the influence of the tech sector, markets will be eagerly anticipating results from the rest of the FAANGS (See ‘Looking ahead’ below).

Commodities: Geopolitics and inventories drive oil prices

• Oil prices rose at the start of the week as Saudi Arabia warned of economic retaliation if the US imposed sanctions over the disappearance of journalist Jamal Khashoggi;
• However, they retreated on Wednesday after the Energy Information Administration published data showing US stockpiles rising faster than expected;
• Omnis view: As the world waits for Saudi Arabia’s explanation for the disappearance of Khashoggi, the oil market appears to be focusing on fundamental drivers of supply and demand.

LOOKING AHEAD - TALKING POINTS

Europe: Italian budget response and ECB interest rate decision

• Italy must respond by noon on Monday to the EU’s claim that the country’s draft budget breaches fiscal spending rules;
• The European Central Bank (ECB) is expected to leave interest rates unchanged when it announces its latest decision on Thursday;

Corporate earnings: FAANGS and British banks to report
• Amazon and Alphabet are the next of the FAANG stocks to report earnings, while Barclays, Lloyds and Royal Bank of Scotland kick off the season for UK banks;

The shares of Alphabet, Amazon and Netflix have outpaced the US equity market over the past five years

Omnis 221018

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This update reflects Omnis’ view at the time of writing and is subject to change.

The document is for informational purposes only and is not investment advice. We recommend you discuss any investment decisions with your Openwork financial adviser. Omnis is unable to provide investment advice. Every effort is made to ensure the accuracy of the information but no assurance or warranties are given.