GLOBAL MARKETS UPDATE - MONDAY 13 NOVEMBER 2017

Posted on 13 Nov 2017

Mounting uncertainty over US tax cut proposals triggered profit taking in global equities. Other “risk on” trades, such as emerging market currencies, junk bonds and industrial metals, also reversed over the week.

United Kingdom

The FTSE 100 dropped 1.7% over the week.

Chancellor Philip Hammond is said to be considering reducing the VAT threshold for smaller businesses from the current turnover level of £85,000 per annum.

The EU gave the UK two weeks to clarify its financial obligations, saying that such clarity was needed if it wanted to start discussions about  transition arrangements in December.

The NIESR predicted that the UK economy had grown 0.5% in the three months to October, helped by stronger global growth and a weak sterling.

UK industrial output grew 0.7% in September, its fastest pace so far this year, thanks mainly to “robust growth” in production of cars and medical equipment. Manufacturing output also rose by 0.7% in September.

US

The S&P 500 slid 0.4% over the week, its first weekly decline in two months.

The Senate unveiled its version of the draft tax bill which contained proposals to delay the cut in corporate taxes until 2019.

President Trump’s tour of Asia delivered mixed messages: the president at first appeared in conciliatory mood, but later reverted to his “America First” rhetoric.  

The University of Michigan’s survey of consumer sentiment slipped to 97.8 in November, down from 100.7, but still the second highest reading this year. 

The Department of Justice told AT&T that it needs to sell CNN to gain approval for its $84.5 billion acquisition of Time Warner.

Europe

The FTSE Eurofirst 300 declined 1.9% over the week as poorly-received earnings reports and uncertainty over US tax cuts weighed on sentiment.

The Council of Economic Experts warned that Germany’s economy is in danger of overheating. In particular, it warned that low interest rates and above-trend growth meant that risk to the country’s financial system are rising, and that conditions threatened to create a bubble in property prices. 

Eurozone retail sales rose 3.7% in September.

Uncertainty over the situation in Catalonia appears to have weighed on Spain’s services sector in October. The IHS Markit Spanish services purchasing managers index fell to 54.6 in October, the weakest reading since the first month of 2017. The IHS Markit Italian services purchasing managers’ index also dropped to a one-year low of 52.1.

Japan

The Nikkei 225 rose 0.7% over the week, touching a 26-year high mid week.

The Nikkei-Markit services purchasing managers’ index rose to 53.4 in October, up from 51.0 in the previous month and its strongest since August 2015.Pacific Basin

11Pacific Rim countries have agreed on the “core basics” of a new trade pact which excludes the US. The new trade agreement will replace the TPP from which President Trump withdrew in January.

Chinese exports rose 6.9% year on year in October, slowing from a pace of 8.1% in September, while imports rose 17.2%, down from a rise of 18.6% the previous month. 

China’s official consumer price index rose 1.9% in October, up from 1.6% in September, due to rising food prices.

Philippine exports slowed in September, rising 4.3% on a year-on-year basis, while imports grew just 1.7%, down from 8.8% the previous month.

Indonesia’s GDP expanded 5.06% year on year in the third quarter, marginally slower than forecast.

Emerging Markets

Saudi Arabia launched an anti-corruption drive, which led to the arrests of more than 200 people, including princes, ministers and prominent businessmen.

Brazilian stocks slid as investors were unsettled by news that the government had apparently given in on achieving substantive pension reform: the market had priced in hopes of significant reform progress by the Temer administration. In other news, Brazilian inflation picked up to 2.7% on a year-on-year basis in October, compared to 2.5% in September.

Bonds

The yield on the 10-year US Treasury bond climbed back to 2.4% amid concerns that the Senate’s proposed corporate tax cuts could be delayed or watered down. Meanwhile, the yield on the two-year note rose to a fresh nine-year high of 1.66%. The yield curve is now the flattest in a decade.

The yield on the 10-year German Bund closed the week at 0.41%.

US junk bonds continued to see significant outflows, with EPFR saying that $2.5 billion has been withdrawn from the asset class over the past month. Over that time, credit spreads, which had fallen to their tightest levels since the financial crisis, have widened circa 40 basis points. The difficult conditions led to NRG Energy to pull a planned $870 million bond sale.

US investment grade corporate bonds have also sold off, with bonds issued by Apple, Sprint, Oracle, AT&T and Qualcomm affected by a proposal to tax multinationals. Merger talks between Disney and 21st Century Fox, as well as Broadcom’s spurned approach to take over Qualcomm and the end of negotiations between Sprint and T-Mobile, also weighed on the market.

Currencies

Emerging market currencies continued to retreat against the US dollar, with the Turkish lira, Mexican peso, Brazilian real and South African rand among the worst affected.

Commodities

Oil prices rose, with Brent crude approaching $65 a barrel, as tensions between Saudi Arabia and Iran intensified.