Market Update: Pound and domestic shares rally as UK and EU agree withdrawal deal

Market Update: Pound and domestic shares rally as UK and EU agree withdrawal deal

22nd October 2019

LAST WEEK – KEY TAkeAways

Brexit: UK and EU agree withdrawal deal

  • The pound hit its highest point in five months against the US dollar as the UK and EU agreed a Brexit withdrawal deal, although it handed back some of those gains when the Democratic Unionist Party (DUP) said it would oppose the deal;
  • The government cancelled a meaningful vote planned for Saturday after MPs backed an amendment designed to avoid an accidental ‘no deal’ Brexit;
  • The Prime Minister consequently had to request a delay to the Article 50 deadline, but he did not sign the letter and wrote another one saying he was not in favour of an extension.
  • Omnis view: The fading prospects of a ‘no deal’ Brexit boosted the FTSE 250 index of mid-sized companies which are particularly exposed to the UK economy. Boris will try to hold a vote on the withdrawal deal early this week but whether or not he can secure a majority remains to be seen. Opposition MPs pledged to seek a referendum to let the UK public make the ultimate decision.

Trade: Doubts emerge about latest truce

  • US shares paused as White House officials warned that tariffs- taxes on companies importing goods from abroad- on US$150 billion of Chinese products planned for December would come into force if China did not commit to the limited trade deal agreed the week before;
  • Meanwhile, the International Monetary Fund (IMF)- a global institution which promotes financial cooperation- blamed trade tensions between the US and China for lowering its forecast for worldwide economic growth in 2019.
  • Omnis view: The fragile nature of the trade truce suggests there may be further uncertainty before a potential meeting between US President Donald Trump and his Chinese counterpart Xi Jinping at the APEC (Asia-Pacific Economic Cooperation) Summit in November.

US: Hesitant consumers raise prospect of interest rate cut

  • Spending by US shoppers experienced its biggest decline in seven months in September, according to data released by the US Department of Commerce.
  • Omnis view: A slowdown in consumer spending increases the chances that the Federal Reserve (the US central bank) will cut interest rates at its next meeting at the end of October.

Asia Pacific: Trade tensions weigh on Chinese economy

  • Chinese shares sank as figures showed the country’s economy grew by 6% in the third quarter of 2019, its slowest pace in nearly thirty years;
  • There was further bad news for the Chinese economy as exports- goods produced in China and sold abroad- fell in September to the lowest level since February.
  • Omnis view: Trade tensions with the US are weighing on the Chinese economy, which increases the pressure on Beijing to find a resolution.

Japan: Trade deal signed with US

  • Japanese shares rose as the country agreed a limited trade deal with the US, which cut tariffs on US agricultural and Japanese manufacturing goods and delayed tariffs on Japanese cars.
  • Omnis view: Japanese markets welcomed the trade deal due to the significant impact it should have on the country’s economic growth.

Companies: US banks get earnings season off to strong start

  • Several American banks reported corporate earnings (company profits) for the third quarter of 2019- JP Morgan, Bank of America, Citibank and Morgan Stanley beat expectations, but Goldman Sachs fell short;
  • Shares in Netflix rallied after the streaming service beat earnings expectations in the third quarter, although US subscriptions fell below estimates.
  • Omnis view: Earnings are one of the main drivers of the stock markets, and US banks set the tone for earnings season, so these results are encouraging. However, overall earnings among US-listed companies are expected to decline by 4.6% according to research firm FactSet.

LOOKING AHEAD - TALKING POINTS

Monetary policy

  • Thursday- European Central Bank interest rate decision.

Corporate earnings

  • Amazon, UK banks Royal Bank of Scotland and Barclays and Caterpillar- a bellwether for the global economy because it is one of the leading producers of equipment for the construction industry- are among the companies reporting corporate earnings this week.

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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.