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Weekly Comment: 26.11.2018

Market Overview, Alan McIntosh

Global stock markets continued to struggle last week as data pointed to a softening of momentum in the global economy. A sharp fall in the crude price hit shares of oil companies, while worries over the ongoing “trade war” between the US and China impacted on market sentiment generally. Meanwhile, technology shares in the US slid further, as the market rotated away from previous stock market darlings such as the FAANG names. Today has seen a bounce in European markets as budget tensions in Italy recede and, perhaps surprisingly, the UK stock market is strong despite the general belief that the Brexit Withdrawal Agreement will not meet with UK parliamentary support.

To recap on some of the main reasons why equity markets have weakened since the start of October; global liquidity is tightening (US interest rates are rising and quantitative easing is reversing) at a time when economic growth is softening. Higher borrowing costs for companies accompanied by weaker demand for goods and services suggests a lower level of corporate earnings growth in the future, hence softer stock markets.

What are the clues we should look for to potentially see this adjustment of share prices come to an end?

Firstly, it is widely believed that US interest rates will rise again next month and possibly by three additional quarter points in 2019, by the Federal Reserve’s own forecasts. Weaker economic data and lower inflation expectations (the oil price has dropped 30% since the start of October) could see the Fed modify its interest rate forecasts downwards.

Secondly, the US-Sino trade talks between President Trump and President Xi later this month may lead to a compromise and avoid additional tariff increases that are due to be levied in January.

Thirdly, from a UK perspective, the Brexit Withdrawal Agreement is ratified by UK parliament on a first or second vote.

Three wishes for Christmas!

Economic Overview, Richard Carter

It took the EU 38 minutes to approve the Brexit withdrawal agreement but that was always going to be the easy part. Theresa May now has to sell the deal to a very sceptical House of Commons before the meaningful vote takes place, probably during the week of the 10th December. All options are on the table if she fails although pundits currently seem to think there could be two bites of the cherry either side of a vote of no confidence in the government.

Elsewhere, the fall in the oil price has led to a drop in inflation expectations in the US. 10 year break-evens in the TIPs market have fallen below 2% to a one-year low and this may take the pressure off the Fed to tighten policy next year. Jay Powell is giving a speech this week which investors will be watching closely for talk of ‘a pause’.

On the data front, there is little reason to cheer. Eurozone PMIs have weakened again in November with the German manufacturing reading dropping to 51.6 and flagging up very soft external demand. US business investment and homebuilder sentiment were also below expectations last week. On the positive side, it does look like the Italian government is preparing some concessions on the budget to appease the EU and prevent a mutually-damaging showdown.

This week, the main focus will be the meeting between President Xi and President Trump at the G20 summit kicking off on Friday. There has been some more optimistic rhetoric from both sides on their trade disagreements but markets are sceptical that we will see anything game-changing.

Investors should remember that the value of investments, and the income from them, can go down as well as up. Investors may not recover what they invest. Past performance is no guarantee of future results.

Any mention of a specific security should not be interpreted as a solicitation to buy or sell a specific security.

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