The Financial Services Centre, Stoney Ground Kingstown, VC0100 SVG

Market commentary for week ending 2018-11-04

Upcoming US midterm election this week could result in a shift in a balance of power in Washington, but it is unlikely to bring any near-term policy changes. Two party control of Congress is expected. Predictions suggest that most likely event will be Democrats taking over the House of Representatives and Republicans will control the Senate. This could have implications of key policies, for example, a continuation of tax cuts. The less likely outcome would be that Republicans retain control of both chambers of Congress. This could have a negative impact on US bonds. The Republican leadership would seek further tax cuts, driving the budget deficit up, leading into the higher issuance of US treasuries, resulting in rising yields.


As usual, First Friday in the month belongs to the US employment data.  They continue to be strong with beating expectations. US economy has added 250,000 jobs during October. Wage gains, which have not grown during this expansion, were strong as well. Meanwhile, the unemployment rate has fallen down to more than 50 year low. This paves the way for the FED to further raise interest rates in December. GDP data for the third quarter grew by 3.5%. The PMI data from US manufacturing at 57.9, lower than estimated 59.0. The data suggest that the US economy is growing, but the growth is slowing down. Purchasing managers were particularly concerned about rising tariffs, rising commodity prices and lack of skilled labour force. The FED is expecting to keep rates unchanged next week. Forward guidance can suggest whether we are going to see another rate hike this year.


Global equity prices in October finished lower. October was the worst month for equities since 2012. Portfolio managers and asset allocators faced hard times as perceived safe haven securities did not provide shelter to the investors either. The recent drag to the prices can be explained as an uncertainty rather than concerns about the future growth and interest rates. Investors are worried that corporate earnings have peaked meanwhile geopolitical risk continue to dampen the sentiment. Tensions in the global trade as a chief driver, downside risk remains the decoupling of global expansion.


Since the beginning of November, we have seen resurrected risk-on where equities together with other risk assets rebound after a sharp decline in October. The news emerged that US president Donald Trump and Chinese leader Xi Jinping could meet at G20 summer in Argentina later this month. The meeting could suggest whether we will see the easing of the trade tension or further problems going into 2019. In case of finding common ground, we could see risk on in asset prices such as equities.


Equity correction has brought down crude oil as well. Concerns over future economic growth in 2019 have emerged. Since October’s top, WTI crude oils is losing over 17%.


European earnings were positive, 55% companies reported so far, with 52% beating expectations. On the other hand, weak economic momentum and political challenges are here to stay. German Chancellor Angela Merkel decided to step down and not to seek re-election as a head of CDU party. This is possibly due to the unimpressive results in the German regional elections where CDU continues losing its votes. The decision brings uncertainty to the German politic scene. European government bonds continue to remain unattractive. Spread between Italian and German 10-year bonds reached 3%. Furthermore, time will tell how Brexit divorce will be settled. Without a clear catalyst, Europe is less appealing compared to the global peers and outperformance is hard to expect.


Next week is going to be very eventful. We are expecting already mentioned US midterm elections. Furthermore data from ISM non-manufacturing PMI, Germany factory orders, US Producer Price Index, University of Michigan Consumer Surveys and last but not least Federal Open Market Committee meeting.

November 05, 2018 - jd_admin