Weekly Financial Market Update for 7th November

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Index     Week   Ytd
Value   CR TR   CR TR
FTSE 100 6693   -4.33% -4.28%   7.22% 11.05%
S&P 500 USD 2085   -1.94% -1.89%   2.02% 3.88%
NASDAQ COMP USD 5046   -2.77% -2.70%   0.78% 1.86%
EURO STOXX 50 EUR 2955   -4.05% -4.04%   -9.58% -7.06%
NIKKEI 225 YEN 16905   -3.10% -3.09%   -11.18% -9.58%
HANG SENG CNY 22643   -1.36% -1.33%   3.32% 7.20%
MSCI EMERGING MKTS USD 880   -2.59% -2.57%   10.83% 13.11%
FTSE WMA Income 2874   -2.13% -2.10%   7.77% 10.73%
FTSE WMA Balanced 3850   -2.83% -2.80%   9.05% 12.02%
FTSE WMA Growth 4471   -3.52% -3.48%   9.91% 13.00%
BARCLAYS STERLING GILTS GBP 267     1.26%     11.17%
GOLD USD 1305   2.32%     22.99%  
WTI USD 44   -9.51%     18.98%  


Notable events over the last week

The pound and FTSE 250 rally on ‘soft’ Brexit speculation

Brexit once again dominated headlines last week with the decision by the High Court to require a Parliamentary vote on invoking Article 50 of the Lisbon Treaty before the legal process of leaving the EU can begin. The decision upholds parliamentary sovereignty and may result in greater scrutiny of the Government’s negotiation plans. The Government has appealed the decision and the case will be considered by the Supreme Court, scheduled for the 7th December. The hearing could potentially result in a delay in the triggering of Article 50 which Prime Minister Theresa May had indicated could be as early as March next year, with a formal exit from the union in 2019. The pound and FTSE 250 rallied on the news, gaining +1.28% against the dollar and +0.68% on Thursday respectively, as speculation of a ‘softer’ exit began to surface again. May reassured voters over the weekend that “Brexit means Brexit” and that she remains committed to achieving the best outcome for the UK. The news followed the announcement from Moody’s who stated that it may downgrade the UK’s sovereign credit rating if it loses access to the EU single market as a result of Brexit.

Clinton’s campaign regains momentum following the closure of the FBI probe

The FBI announced late last night that it found no evidence of criminal wrongdoing in Clinton’s use of a private email server. The case was reopened little over a week ago and initially boosted the Republican candidate, Donald Trump’s campaign, with his probability of winning advancing to as much as 40% according to fivethirtyeight politics. Since the news, Trump’s chances have come in to around 33% with Clinton benefitting from a surge of support from Hispanic voters in the latest polls. The dollar jumped +1.2% against the Yen in early trading this morning whilst the Mexican Peso, a favorited proxy for this US election, surged +1.83%. American’s formally go to the polls on Tuesday and markets are likely to see an increase in volatility as the results are announced on Wednesday.

Carney turns hawkish on the UK economy

Overall, the Monetary Policy Committee (MPC) presented a fairly sanguine outlook for the UK economy in its latest inflation report. A significant drop in the value of the pound means that inflation is now expected to overshoot the MPC’s 2% target during 2016. CPI is now expected to rise to 2.7% in 2017 and 2018 before falling back gradually over 2019 to reach 2.5%. The MPC noted that it is willing to accommodate a period of above target inflation given the risks around the economy and importantly, the Bank of England (BoE) Governor, Carney, stressed that the Bank has the tools to respond to economic shocks as they arise in order to ‘ensure a sustainable return of inflation to the target’. The report followed news that Carney has agreed to extend his term as Governor to June 2019, from his original 5 year service ending in 2018, hence committing to guide the UK through the early stages of the departure from the EU.

Market expectations of a December US rate hike continue to climb

Following the FOMC meeting last week, market expectations for a December rate hike spiked to 78% from 68% at the beginning of last week. The accompanying statement suggested that the case to increase rates has ‘continued to strengthen’ and crucially recognised the likelihood for a pick up in inflation. Fed Vice Chairman Fischer added that the US economy could ‘to some extent exceed our employment and inflation targets’ and that ‘our assessment is that the most recent data have further strengthened the case for increasing the target range for the federal funds rate’. Further support for a hike was provided in the non-farm payrolls data which showed the US economy created 161,000 new jobs last month (vs. 175,000 expected). Despite the miss, a reduction in unemployment to 4.9% and a 10 cents tick up in average hourly earnings, reflecting an annualised increase of 2.8% in wages, should be enough to solidify a Fed rate increase in December. Elsewhere, the ISM non-manufacturing reading also dropped last month to 54.8 from 57.1 in September (vs. 56.0 expected). The reading remains above the year to date (YTD) average of 54.6, while both new orders and business activity fell but still remain at a robust level of 57.7.

UK Manufacturing shows modest growth while Services proves robust

October’s headline Markit/CIPS manufacturing PMI fell to 54.3 from an upwardly revised 55.5 in September, broadly in line with 54.4 expected and still comfortably above a reading of 50, indicative of economic expansion. Input prices rose sharply for the period to 80.3 from 70.4 in September – its highest in almost six years and a level which has been historically consistent with inflation rising to well over 3%. Encouragingly, October’s balance is suggestive of a quarterly rise in manufacturing of almost 1%, balancing the 1% contraction seen in Q2. Elsewhere, October’s Services PMI rose to 54.5 from 52.6 in September (vs.52.4 expected). The index has risen for the third month in a row following a sharp decline in July in the wake of Brexit. With Services accounting for 80% of UK GDP, the persistency of this rebound in activity is essential for the country’s economic success as it negotiates its position outside of the EU.

Q3 2016 Earnings

It has been a broadly positive earnings season in the US so far with 75% of circa 84% of the S&P500 who have reported so far, beating EPS estimates, surprising positively by 5%. Q3 EPS growth prints at +1% year on year (YoY) for the overall market and at +4% ex-Energy with top line growth running at +1% YoY and +4% ex-Energy. Overall, earnings are more positive for Defensives and Financials than for Cyclicals, with the season proving particularly soft for Energy, Telecoms, and Industrials. Elsewhere, Healthcare, Staples, Discretionary and Materials have delivered significantly higher EPS growth.

Coming up this week (Source Bloomberg)  

Day Data Release Consensus Prior
Tuesday Japan BoP Current Account Balance Sep ¥2020.0bn ¥2000.8bn
  United Kingdom Industrial Production MoM Sep 0.00% -0.40%
  United Kingdom Manufacturing Production MoM Sep 0.40% 0.20%
Wednesday China CPI YoY Oct 2.10% 1.90%
  Japan Machine Orders MoM Sep -1.50% -2.20%
  United States MBA Mortgage Applications Nov -1.20%
  China PPI YoY Oct 1.00% 0.10%
  United States Wholesale Inventories MoM Sep F 0.20% 0.20%
Thursday United States Initial Jobless Claims Nov 260k 265k
  Japan PPI YoY Oct -2.60% -3.20%
Friday United States U. of Mich. Sentiment Nov P 87.9 87.2
  Japan Tertiary Industry Index MoM Sep -0.20% 0.00%
Sunday Japan GDP SA QoQ 3Q P 0.20% 0.20%
  Japan GDP Annualized SA QoQ 3Q P 0.80% 0.70%
  Japan GDP Deflator YoY 3Q P 0.30% 0.70%
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