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Market round-up: 01 – 05 October 2018

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The information in this blog or any response to comments should not be regarded as financial advice. If you are unsure of any of the terminology used you should seek financial advice. Remember that the value of investments can go down as well as up, and could be worth less than what was paid in. The information is based on our understanding in October 2018.

For fans of the popular Swedish pop group ABBA, recent news flows have been somewhat reminiscent of their greatest hits compilation. With European markets having been jolted last week by Italy’s failure to tackle its debt load, we went from Mamma Mia! To Dancing Queen as Prime Minister Theresa May jolted on stage to deliver a keynote speech to the 70s classic.

Although her dance up to the stage at the Tory Party conference may have seemed light hearted, her message was a serious one. Money, Money, Money was top of the agenda as Teresa May declared that “austerity is over”, a signal that the fiscal conservatism of the Cameron-Osborne era was no longer a pillar of Conservative economic policy.

Prime Minister May’s speech, although undoubtedly more successful than last year’s somewhat comedic effort, had little effects on markets, who had their focus set firmly on events in North America. The beginning of the week saw the United States and Canada forge a last gasp deal to salvage NAFTA as a trilateral pact with Mexico, rescuing the three countries, $1.2 trillion open trade zone, that was close to collapsing after nearly 25 years. Since talks began over a year ago, it was clear that Canada and Mexico would have to make concessions in the face of President Trump’s threats to tear up NAFTA and the relief was palpable when a deal emerged with many original clauses still intact. Close to issuing an SOS, negotiators worked frantically ahead of the midnight deadline to settle any difference, with both sides making a number of concessions to get the contract signed. Global markets soared on the news, as hopes that a softer stance on trade from the US would carry forward into stalling negotiations with China.

By Thursday, the appetite for riskier assets had faded drastically. They say the winner takes it all, with the USD continuing to dominate most other currencies, a theme that has dictated market movements for much of 2018. Moving in conjunction with the dollar, US treasuries carried on their upward trajectory, hitting multiyear peaks on Thursday as robust economic data and hawkish speeches by Federal Reserve officials stoked concerns that US rates would have to tighten quicker to curb inflation.

Fears that heightened inflation could be coming were compounded by Non-Farm payroll data, released on Friday afternoon. The payrolls data fell short of economists’ expectations at 134,000 versus an expected 185,000. But it was unemployment that grabbed attention, falling to the lowest level since 1969 at 3.7%.

 

After a busy start to October, markets should find some solace during the start of next week. Commemorating the landing of Christopher Columbus in the Americas in 1492, US markets will close in commemoration of the anniversary on Monday.

Having sailed across the Atlantic in the Santa Maria, attempting to find a new route to India, Columbus always insisted the new lands he was discovering in both North and South America were in fact the eastern end of the Asian continent. Columbus’ refusal to accept that he was not landing in Asia may well explain why South American countries such as Columbia bear his name, whilst North America is named after Amerigo Vespucci, even though he reportedly sailed to the Caribbean over 10 years later.

The link between the two continents once thought to be the same, has strengthened in recent weeks as a dominant US dollar has weighed on almost all Asian economies, including both India and China. With a raft of strong US economic data raising the likelihood that the US Federal Reserve will have to act to curb rising inflation. Thursday will help us gauge how quickly prices are rising in the US as Consumer Price Inflation data is released. The numbers will depict the change in the price of goods and services purchased by the consumer on a month to month basis. With the Fed targeting 2% inflation, this reading will have an impact on future monetary policy decisions to avoid an overheating economy.

On domestic shores, UK Month on Month GDP is released on Wednesday. Economists value the data highly as it acts as the broadest measure of economic activity and the primary gauge of the economy’s health. With Brexit negotiations getting nearer and nearer to a scheduled deadline, an economically strong UK could be a real boon for the government so we can expect both the City and Westminster to be examining the announcement carefully.

The week is rounded off by a three day IMF meeting which extends into the weekend. Such meetings are often held twice a year and also attract representatives from the World Bank. A formal statement covering policy shifts and meeting objectives is released afterwards and the comment can have a profound impact on markets, especially currencies.

 

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