Chief Investment Strategist
Market overview – Alan McIntosh
In a nervous week for equity markets, UK shares suffered their heaviest drop for nearly four years. Poor economic data showed the services sector slowing down sharply in September, adding to the gloom from the manufacturing sector. For once, the UK market wasn’t responding to the daily spiral of Brexit news and the gyrations of sterling, but to the feeling that the UK economy was heading for recession. Reasonably reassuring employment numbers from the US on Friday pushed global equities higher however, clawing back some of the losses from the previous trading sessions.
Despite what seems a constant flurry of negative news, shares have still enjoyed a good return so far this year. The US market is ahead by around 20%, and even the more immediately challenged UK stock market is up by around 10% including dividends.
Whether these levels continue to be held for the balance of the year will mainly depend on central bank policy. There is still an expectation that the Federal Reserve will reduce interest rates later this month (for the third time this year), slowly reversing the progressive monetary tightening of the previous few years. Europe has already embarked on another round of easing in recent weeks and it looks as if the Bank of England may well have to follow suit if the UK economy weakens further. Elsewhere, the mood of individual companies will become clearer over the next few weeks as the third quarter reporting season gets underway.
Economic overview – Richard Carter
Last week’s economic data did little to ease investor fears about a possible global slowdown. The closely-watched ISM manufacturing index in the US was worse than even the gloomiest predictions and fell to its lowest level in ten years. A lot of this can be blamed on Trump’s trade wars but some of the sub-components relating to new orders and employment did not make for good reading. The report was also followed up by a weak ISM services number which suggested there is starting to be some spill-over to the wider economy. The Federal Reserve is likely to respond with another interest rate cut at the end of this month despite Friday’s nonfarm payrolls confirming that the jobs market is still strong.
Looking ahead this week, markets will focus on the US-China trade talks scheduled for Thursday in Washington. The chances of a comprehensive deal emerging seem low but hopefully the two sides will make progress and avoid another round of tariffs. US inflation numbers are also out on Thursday, but are not expected to move markets.
On the Brexit front, further discussions will be held this week around the UK’s latest proposals. The two sides look quite far apart on the issue of the Northern Irish backstop and it is hard to see them reaching a workable compromise in the remaining time available. Boris Johnson has the DUP and hardline Conservative ERG faction on board with his proposals because he plans to keep Northern Ireland out of the EU customs union and would allow the Northern Irish assembly a veto over regulatory alignment with the EU. If he compromises on either of these two issues, he would probably lose the ability to get the deal through Parliament. An extension to Article 50 followed by an election still looks to be the most likely short-term outcome and sterling continues to drift sideways in the meantime.