LAST WEEK – KEY TAKEAWAYS
Global trade: No sign of a break in trade tensions ahead of midterms
• US President Donald Trump followed through on his pledge to impose trade tariffs on another $200 billion worth of Chinese goods, starting at 10% and rising to 25% in 2019 if the two sides do not come to an agreement in the meantime;
• China retaliated with its own round of tariffs of between 5% and 10% on $60 billion of American products and accused the US of a lack of ‘good faith’ in trade negotiations;
• Tech stocks weighed on the US markets at the start of the week, but they rebounded after certain consumer electronic products were exempted from US tariffs;
• Omnis view: As promised, the US and China swapped further tariffs, although they were lower than expected which the markets welcomed. However, we still do not see a breakthrough taking place before the US midterm elections in November.
United Kingdom: Mixed week for sterling driven by economic data and Brexit
• Sterling rallied against the US dollar and the euro as inflation hit its highest level in six months and growth in retail sales exceeded expectations for the three months to August;
• Sterling then fell after the EU rejected the economic proposals in Prime Minister Theresa May’s Chequers plan at its leader’s summit in Salzburg;
• Omnis view: Weaker sterling supported UK equities, but uncertainty has intensified again following the inauspicious conclusion to the EU summit. Nonetheless, our outlook remains the same- we foresee a soft Brexit, at least initially, which could serve as a prolonged transition period while the two sides negotiate a harder Brexit.
Emerging markets: Oversold rally due, but out of EM’s control
• The lira strengthened as the Turkish government published its medium-term economic plan which included a more prudent approach to infrastructure investment;
• India announced a series of import restrictions in an effort to support the rupee and narrow its current account deficit;
• The Russian rouble also rose, partly driven by higher oil prices (see Commodities);
• Omnis view: On the whole, it was an encouraging week for emerging markets (EM) as the Turkish and Indian governments took steps to stabilise their economies and reassure the markets. We believe an oversold rally is due in EM, although whether or not it transpires depends on how long trade tensions persist and the trajectory of US interest rates (see Looking Ahead).
European Union: Italy reassures markets on government spending
• Italian markets rallied as Finance Minister Giovanni Tria eased concerns about government spending, acknowledging the coalition must reduce debt and manage the budget deficit;
• Omnis view: Further reassurance from the coalition government that it will stick to EU budgeting rules provided some relief for the Italian bond markets and improved Europe’s economic outlook.
Commodities: Rally in oil prices boosts EM and UK markets
• Oil advanced after Saudi Arabia announced it was comfortable with the price rising above $80 per barrel and US inventories fell to their lowest level since 2015 ;
• The price of industrial metals including copper and zinc rose as demand from China held up, despite the latest round of trade tariffs;
• Omnis view: While oil has boosted some EMs, it could also be acting as a catalyst for the UK markets as the oil and gas sector is heavily-weighted on the FTSE 100.
LOOKING AHEAD - TALKING POINTS
Central banks: Federal Reserve expected to raise rates
• The Fed is widely expected to raise interest rates to 2.25% at its meeting on Wednesday;
• Omnis view: Investors have factored in the next two interest rate increases from the Fed, so the issue is how much further they will go and how fast.
Federal Open Market Committee member expectations for the trajectory of US interest rates
European Union: Italy to announce budget outline
• The Italian coalition government will publish its budget outline on Thursday, including its eagerly anticipated fiscal plans;
• Omnis view: We will continue to monitor developments in Italy ahead of the budget announcement in October and manage our allocation to European equities accordingly.
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This update reflects Omnis’ view at the time of writing and is subject to change.
The document is for informational purposes only and is not investment advice. We recommend you discuss any investment decisions with your Openwork financial adviser. Omnis is unable to provide investment advice. Every effort is made to ensure the accuracy of the information but no assurance or warranties are given.