Following a week of heavy losses, equity markets struggled to find clear direction last week as a positive start to the US corporate earnings season failed to offset political risks weighing on sentiment. This week sees no let-up in political news flow with developments in Saudi Arabia and Italy chiefly in focus. On the macroeconomic front, the European Central Bank’s monetary policy meeting and third quarter estimates for US economic growth numbers will be the highlight of the week.
Saudi Arabia’s “future investment initiative summit” due to be held this week was meant to provide an opportunity for the country to showcase its wealth and future prosperity. Dubbed the “Davos in the Desert” the event is an opportunity for business leaders to gather in support of Saudi Arabia’s 2030 vision of diversifying the economy away from fossil fuels. However, the news over the weekend that the country admitted that reporter Jamal Khashoggi died in their consulate after previously denying any knowledge of his death has received international condemnation. Of greater interest will be whether sanctions are imposed on an important Western ally in the Middle East.
Rome’s confrontation with Brussels over the Italian budget continues this week, with the Italian government set to respond to Brussels criticism of its budget today. With the Italian government taking an uncompromising stance to its budget thus far, the events this week could provide the litmus test for the European Commission’s ability to police national budgets. It remains a tough balancing act for Brussels, push too hard and risk strengthening eurosceptic sentiment in Italy but too lenient a stance risks a counter reaction from other European members that comply with the rules. Investor sentiment around Italian assets has deteriorated in recent weeks and with debt rating agencies issuing downgrades (with more set to come) we are at a particularly precarious moment.
Moving away from politics, the ECB is unlikely to make any significant changes to its monetary policy this week when they meet on Thursday. The bank is on course to end its bond purchasing programme by the end of the year but with European politics in a sticky patch, the ECB’s every move is being heavily monitored. Investors will be paying attention to ECB president Mario Draghi’s post meeting press conference for any emphasis he places on the downside risks to European growth from the Italian budget, Brexit, emerging markets or softening Chinese growth.
Over in the US, Friday sees the release of the first estimate of economic growth over the third quarter of this year. The US economy is expected to have grown at an annualised rate of 3.3% over the third quarter, down from the 4.2% rate recorded over the second quarter. However, if confirmed, the pace of growth would still be higher than what is assumed to be the long term potential growth rate of the economy. Should the US economy continue on this trajectory, investors will expect the US Federal Reserve to raise interest rates again in December.
The big Brexit story last week was the news that Prime Minister Theresa May is willing to extend the Brexit transition period beyond the current December 2020 end date by “a matter of months”. An extension would give negotiators more time to tackle some of the biggest obstacles blocking a deal, such as the Irish backstop and the period of frictionless trade with the EU.
By increasing the transition period, the EU would expect further contributions to the EU budget and a longer period of free movement of people. The extension proposal has been widely criticised, further raising concerns over the stability of Mrs May’s tenure. She is due to meet with her backbenchers this week in the hope of securing further support.
Whilst the UK political situation continues to create headaches, the macroeconomic environment remains fairly steady. U.K. average weekly earnings rose to an annualised rate of 3.1% in September, its fastest rate of growth since 2009. CPI inflation for September fell to 2.4%, an outcome which provides a boost to households “real wage growth”. The one slight disappointment last week from the U.K. was retail sales numbers for September, which declined more than expected. However, we would note that the figures do follow exceptionally strong July and August numbers and the broader spending patterns amongst U.K. consumers remain strong.
In contrast, Chinese economic data continues to disappoint. Third quarter economic growth numbers were below expectations, which showed the economy growing at an annualised rate of 6.5% versus the forecasted 6.6%, its weakest rate of quarterly growth since 2009. Whilst the miss in growth estimates is small, the downside risks to economic growth should not be underestimated. The underlying details showed industrial production was weaker than expected whilst retail sales and fixed asset investment were both above estimates. Over the weekend, the Chinese government cut individual income taxes in a sign that they are concerned about the economy.
Netflix shares surged last week after the company reported higher than expected growth in new subscribers over the third quarter. Netflix added 7.0m new subscribers over the third quarter, far higher than the 5.3m expected. The company also issued optimistic guidance as they expect to add another 9.4m in new subscribers over the fourth quarter of the year, higher than the 8.4m previously estimated.
Unilever, the producer of Dove soap and Ben and Jerry’s ice-cream, reported a 3.8% rise in sales during the three months to September as the company was successfully able to pass on higher costs to consumers. In the past the company has failed to increase prices and grow sales volume at the same time, in what may be seen as a decline in consumer loyalty to their big name brands. The company must strike the right balance between prices and volumes going forward if it is to match sales growth forecasts for this year and next.
Source: Bloomberg. Figures are for the period 15th October to 19th October 2018.
Where the index is in a foreign currency, we have provided the local currency return.
The above chart provides the performance for the three developed market geographies where the TMWM MPS portfolios maintain their largest exposure. All investments and indexes can go down as well as up. Past performance is not a reliable indicator of future performance.
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