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Weekly comment: 09.10.2018

Market Overview, Alan McIntosh

With the US Dow Jones Index recording a new all-time high last Wednesday, the market mood Stateside was positive until strong economic data on Thursday and Friday pushed bond yields higher and stocks lower. Levels of employment continue to rise in the US and with companies paying staff more (Amazon being the most recent to raise wages), there is a fear that this will lead to higher inflation and prompt the central bank, the Federal Reserve, to raise interest rates faster than the market is anticipating in order to forestall this. Growth stocks which typically sit on above average price/earnings ratios are sensitive to higher discount (interest) rates. Unsurprisingly, they have suffered most in this sell-off, with many of the US technology names retracing sharply over the past few days.With the US Dow Jones Index recording a new all-time high last Wednesday, the market mood Stateside was positive until strong economic data on Thursday and Friday pushed bond yields higher and stocks lower. Levels of employment continue to rise in the US and with companies paying staff more (Amazon being the most recent to raise wages), there is a fear that this will lead to higher inflation and prompt the central bank, the Federal Reserve, to raise interest rates faster than the market is anticipating in order to forestall this. Growth stocks which typically sit on above average price/earnings ratios are sensitive to higher discount (interest) rates. Unsurprisingly, they have suffered most in this sell-off, with many of the US technology names retracing sharply over the past few days

In the UK, the Brexit merry-go-round continues. The latest rumbling is that Theresa May is looking at a proposal that would keep the UK in a customs union with the EU for a “prolonged” period, thereby getting round the conundrum that is the Irish border question. Such a deal, if agreed with the EU, would likely be well received by the market, but might encounter strong opposition among the hard Brexiteers in her Party. The Prime Minister would have to persuade some of her colleagues that the alternative could be a general election which Labour might win or a referendum which might lead to no Brexit at all. Much still to play for.

Economic Overview, Richard Carter

There was quite a large rise in bond yields last week amid strong economic data and further signs of rising inflation pressures. The news out of the US led the way once again with very upbeat PMI numbers and a fall in the unemployment rate to the lowest level since 1969. There was also news from Amazon that they will be raising the wages of their lowest paid workers while the oil price remained firm. This helped to push 10 year Treasury yields up to the highest level since 2010 as markets reappraised their outlook for Fed rate rises.

In the UK, the focus was squarely on the Tory party conference and Brexit talks. There seems to be rising optimism that a deal can be done before the end of November but a backstop on the Irish border must be agreed first and it will need to command the support of the House of Commons. Given the uncertainty, it is impressive that the UK economic data has not fallen off a cliff and actually remains reasonably firm.

Elsewhere, Italy remains in the market crosshairs and there is no sign of either the Italian government or the EU backing down over their budget plans. The spread to Germany is through 300bps today and it is to be hoped that some sort of compromise is agreed and quickly. Italy and Brexit will likely dominate the headlines this week while US inflation numbers are out on Thursday.

Investors should remember that the value of investments, and the income from them, can go down as well as up. You may not recover what you invest. This commentary has been produced for information purposes only and isn’t intended to constitute financial advice; investments referred to may not be suitable for all recipients. Any mention of a specific security should not be interpreted as a solicitation to buy or sell a specific security.

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