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Market commentary for week ending 2018-10-28

The third quarter GDP results surprised positively to the upside. The real growth reached 3.5%. The decomposed data shows more details into this figure. Consumer spending and government expenditures were the main sources of strength, 4% and 3.3% respectively. These categories benefit from the lower federal personal tax and higher federal spending. The trade data and inventories were uneven, this is most probably caused by tariffs. The future expectations are heading lower, with tax cut effect fading out. Therefore fourth-quarter GDP at this point is expected to be somewhere around 2.5%. Going into 2019, in the first half,  real growth should be hovering around 2%, later it will be probably sub 2%.


Flash manufacturing and services PMI in Europe, preliminary data to the leading indicator regarding the economic activity, are reported lower than expected. This suggests that European official PMI data are heading lower. Another important indicator from Germany – Ifo business sentiment, deteriorated. Corporate confidence fell to 102.8 in October after a drop to 103.7 in September. The comments were made that the growth temporarily halts due to the risks with US vs. China trade unrest and unsettled Brexit. On the other hand, US flash PMI is reported in line with expectations. The bottom line is that the US is maintaining the momentum while Europe is losing it.


US markets suffered a sharp correction, the large-cap index S&P 500 ended down 2.3%. The downturn was most probably caused by de-risking. Defensives were leading, with consumer staples on the top, followed by utilities. On the other hand, the energy and industrial sectors were losing the most, losses were between 5% to 7%. Uncertainty over protectionism could hit corporate margins. The earnings seasons has fuelled market volatility and companies that fall short of expectations are being attacked. However, more than 80% of US companies have beaten expectations with earnings.


Bank of Canada took another step towards policy normalisation by rising overnight rate by 25 basis points to 1.75%. This step was widely expected by the market participants. Forward guidance has shifted from “gradual approach” phase to wording which stresses the need to raise rates to the neutral zone. The assessment of the economy was positive, mentioning business expansion, investments and exports. Going onward, economic activity should remain near potential. Headline inflation moves within the target. Labour shortages could make inflation pressure in the future.


Rating agency Moody’s downgraded Italian sovereign rating to one notch above junk status. Their outlook remains stable. Other rating agencies have not reacted yet. The rating agency said a prime reason for its cut was the government’s recently announced budget, which forecasts a deficit of 2.4% of the gross domestic product next year, three times higher than the previous target. Expansionary fiscal policy means Italy’s public debt would likely remain at the current 130% of GDP in the coming years, rather than decline. As expected, the European Commission rejected the Italian budget proposal. As a reaction, the Italian government spreads widened over Germany’s.


Jail Bolsonaro won the presidential election in Brazil. He gained 55% of the votes against the former army captain trounced Fernando Haddad, a leftist Workers’Party’ former Sao Paulo mayor. Bolsonaro made promises to open up the resource-rich economy to private investment, strengthen ties to the U.S. and unleash an aggressive crackdown on epidemic crime. Brazilian equity market reacted positively, stocks jumped to the highest level on record following a decisive victory.


Next week we are expecting employment data for October. Furthermore, the focus will shift on the Manufacturing and Non-Manufacturing surveys of purchasing managers.

October 29, 2018 - jd_admin