Europe
Europe’s markets have rebounded after yesterday’s losses on reports out of the US that a budget blueprint had been agreed for 2018 that increased the probability that we could see a new tax reform package passed in the coming months.
Optimism over some form of tax reform in the US has waxed and waned constantly since the beginning of the year, and while there still remains some way to go before a plan passes the house, the fact that some progress on a blueprint has taken place, can be seen as progress.
We also saw a slightly more positive tone out of Brussels with respect to the Brexit talks after German Chancellor Angela Merkel acknowledged that the EU side also needed to move on its negotiating position in the Brexit talks. This would appear to be a significant shift of tone at a time when the EU stance has previously shown no signs of compromise. What also appeared to be significant was an admission by Donald Tusk that the separate internal EU27 talks on trade would take UK proposals into account.
While we’ve seen new record highs for the DAX this week it’s been a mixed picture for markets in Europe more generally, with gains being fairly limited and the Spanish and Italian markets underperforming, ahead of a possible escalation of tensions between Madrid and Catalonia this weekend, as well as two non-binding regional referendums in Italy on Sunday, where voters will be pushing for more fiscal autonomy.
It’s not been such a positive week for UK stocks with the FTSE 250 closing the week sharply lower, while the FTSE 100 has also struggled, on the back of a string of profit warnings, from a number of high profile UK companies, with Unilever (LON:ULVR) and Reckitt Benckiser (LON:RB) both finishing a poor week on a disappointing note.
It has been a strong week for UK banking stocks ahead of next week’s quarterly updates with Barclays (LON:BARC), Lloyds (LON:LLOY) and Royal Bank of Scotland (LON:RBS) set to report their latest numbers. Optimism is high that all will post fairly decent numbers amidst speculation about an increase in the base rate which should will have helped with respect to their margins for the current quarter.
RBS in particular will be under special scrutiny given recent publicity over its GRG unit. Will it have to set aside further provisions in respect of the FCA investigation? The shares have risen to their highest level since January 2016 this week on hopes that the bank will finally be able to return an annual profit for the first time since 2008.
US
US markets opened at new record highs today, after another record close for the Dow last night, as speculation around the new head of the Federal Reserve continues to gain traction, while the prospect of tax cuts and/or tax reform helped put another floor under US stocks after some initial weakness in early trade yesterday.
On the companies front General Electric (NYSE:GE) disappointed market expectations on their Q3 numbers by downgrading their full year outlook sharply from over $1.50c a share to below $1.10c. This is a big miss with most of the losses coming from its oil and gas business. The shares opened sharply lower as investors mulled the next steps in what is likely to be a big restructuring job, which is due to be outlined at a meeting in November.
Having seen Unilever, Nestle and Reckitt Benckiser miss expectations this week it wouldn’t have been a surprise to see Procter & Gamble (NYSE:PG) also fall short on the revenue and sales side. On the plus side profits did come in ahead of expectations, but sales did fall short and this could well hype up the antagonism currently being played out between the P&G board and activist investor Nelson Peltz.
FX
The pound has continued to trade in a choppy range as speculation grows as to the willingness of the Bank of England to pull the trigger on a rate rise this year, hitting one week low against the US dollar before rebounding. Jon Cunliffe, deputy governor of the Bank of England became the latest central bank official to suggest that rates need not have to rise soon.
The central bank is playing a dangerous game with markets here, having cried wolf on several previous occasions, and with markets largely having priced a move in, it would be seriously damaging for their credibility if they were to pull back now. Governor Mark Carney already has a reputation as the “unreliable boyfriend” and if the bank were to back away again the pound could well fall back sharply.
Chief economist Andrew Haldane has already warned of the risks of inflationary pressures becoming entrenched, and a weak currency will only amplify those risks. The risks of misleading the markets yet again could blow a huge hole in how the central bank is perceived by investors.
A slightly more positive tone out of Brussels with respect to the Brexit talks also helped, with German Chancellor Angela Merkel acknowledging that both sides needed to move for further progress to be made.
The New Zealand dollar has continued to get punished by the markets as traders mull the risk of a new Labour led coalition government.
The Japanese yen has also had a disappointing week, though with the Nikkei 225 hitting a 21 year high you won’t hear anyone in the Japanese government complaining ahead of this weekend’s Japanese elections, where it is expected that Prime Minister Shinzo Abe will retain power.
Commodities
Crude oil prices have slid back for the second day in succession and look set to post a weekly loss despite hitting two week highs earlier this week over concerns about rising Middle East tension between Iraqi and Kurdish troops around Kirkuk. This, along with speculation that OPEC were looking to extend the oil price caps well into 2018 while reinforcing their determination to underpin prices, also point to the fact that the market remains some way short of rebalancing.
It’s not been a good week for gold prices, slipping back as speculation picks up about the prospect of US tax reform, as well as an improving US economy. While a December rate rise appears to be an almost done deal, speculation about the next Fed chief is also weighing on prices as investors weigh up what effect each candidate might have on US monetary policy.
In reality whoever is chosen isn’t likely to make too much difference given that their vote will count the same as everyone else. For now the front runner appears to be Jerome Powell and he is widely perceived to be the continuity candidate, in the event Yellen doesn’t stay on.
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