Weekly market recap: trick or treat
Still scarred from an early life experience where some evil soul dipped raw Brussels sprouts in chocolate, re-packaged them in Ferrero Rocher wrappers and handed them out to unsuspecting victims in fancy dress, I successfully avoided the Halloween festivities for another year.
Trick-or-treat has been a theme of the markets in recent weeks, with last week sitting in the treat camp. Asset class returns in sterling and local currency are below; global equity markets rallied as the US president declared that China was now ready for a trade deal. Coincidentally, this came just a week before the US mid-terms which are due to set the stage for US policy over the next two years.
Table 1: GBP total returns
Table 2: Local CCY total returns
On the other side of the Atlantic, markets rallied in response to a Bloomberg report late last week that US President Trump had asked key members of his cabinet to draw up a draft deal which would have the potential to stop the escalating trade conflict with Beijing. South China Morning Post subsequently reported that Chinese President Xi had accepted an invitation extended by the US president for a dinner after the G20 summit which is due to take place at the end of November.
Though equity markets breathed a sigh of relief at this news, with positive returns across the board, some market participants maintained an elevated level of scepticism towards the announcement. Voters in the US are set to head to the polls for the US mid-term elections this week, so a positive announcement on trade which paints China as making concessions to the US will likely act to shore up last minute support for the US president.
Chart 1: After a month of sliding US equities, positive news flow last week begun to reversed the negative momentum in the market
Closer to home, deal making has also been in the news as UK Brexit Secretary Dominic Raab revealed that he expected a full withdrawal agreement to be agreed by 21 November. This would include a provision for the Northern Irish border. A November deadline fits the current consensus view that the UK Government is looking to call for an “emergency” meeting of the European Council in November (see timeline below) at which a final withdrawal agreement could be officially announced. As a result, sterling – widely seen as a barometer of political risk in more recent times – rallied circa 1% against numerous currencies.
Chart 2: Timeline of the UK’s withdrawal from the European Union
Source: EQ, European Commission
Though we expect the next largest challenge for the UK Government to be gaining Parliamentary approval for the withdrawal agreement, the announcement by Mr Raab is a welcome step. We are therefore looking for any new meetings appearing on the European calendar and are braced for elevated volatility in sterling as the agreement navigates Westminster.
With regard to the US, the mid-term elections this week will be a crucial indicator for to how the US president will be able to proceed on both domestic and foreign policy. Should the Republicans lose control of either House, the president will face gridlock in Congress and will struggle to pass any domestic legislation. Therefore, we could expect the US president to take an even more active role on the world stage as foreign policy is one of the few powers that the executive can control without congressional approval.
THE WEEK AHEAD
Monday: Indonesia Q3 GDP, US ISM Non-Manufacturing PMI
Tuesday: Reserve Bank of Australia Interest Rate Decision, US Mid-Term Elections
Wednesday: Canada Ivey PMI, European Central Bank Non-Monetary Policy Meeting
Thursday: China Balance of Trade, Germany Balance of Trade, US Federal Reserve Interest Rate Decision
Friday: Reserve Bank of Australia Statement on Monetary Policy, China Inflation Rate, UK Balance of Trade, UK Q3 GDP, US Michigan Consumer Sentiment
STAT OF THE WEEK: £68 billion – the UK’s trade surplus in financial services, nearly equal to the US, Switzerland and Luxembourg – the next three leading net exporting countries – combined (The City UK).
Data correct as at 02/11/2018.