Market Insights – November 12th, 2018

Each week, a team of experts shares its market views with you.

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Essentials

Despite the two rate hikes by the Bank of England, UK yields are still at rock bottom. This is because of the uncertainty surrounding Brexit and the country’s sluggish economy. In October, the services PMI fell to its lowest level since July 2016.

The much-expected slowdown in the earnings growth of US companies never materialised in the third quarter. A few weeks ago, the consensus was for earnings to rise by 20% in Q3, but they actually rose by more than 25% – a sign that the US economy is still going strong.

As the deadline set by the European Commission draws nearer, concerns about Italy’s 2019 budget weighed on the euro, which hit a 16-month low. A softer euro should give a boost to the region’s stock markets, and especially exporters shares.

Are oil prices still worth striking about?

There is anger about rising fuel costs in France, even though oil prices have actually dropped off sharply recently. But there are several events that could disrupt oil supplies in the coming months. Despite receiving almost no support from the international community, the USA made good on its threats and reimposed an embargo on Iranian oil. At the same time, Saudi Arabia – Opec’s biggest oil producer – is threatening to drive up prices if sanctions are brought against it following the disappearance, and probable execution, of a journalist who was highly critical of the country’s regime. But production of unconventional oil remains high in North America, even to the point of saturating existing pipelines. The market therefore doesn’t seem too worried about these threats to supplies. It is perhaps more concerned about demand, as the economies of certain oil-consuming countries, like China, are losing steam. After hitting a four-year high in early October, oil prices have dropped by almost 20% in recent weeks. And prices have been more or less stable over the past 12 months. Energy prices have long spurred inflation, but the recent negative base effect seems to be about to come to an end. In July, US consumer prices rose 3% over the previous 12 months. The figure then dropped to 2.3% in September. If this slowdown continues it could dent the Fed’s credibility, given that it has adopted a very hawkish stance recently. Luckily, the Fed will still have the threat of rising wages to fall back on. While we expect a further rate hike at the Fed’s upcoming meeting in December, the energy price trend could curb the expectations of most economists, who have forecast three – or even four – hikes next year. This will provide some relief to the stock markets and also supports our view that most of the rise in long-term rates is probably behind us. As they get ready to bring an end to their emergency measures after years of extremely loose monetary policy, European central banks, however, will be hoping that the decline in prices at the pump ends soon.

US mid-terms – a reassuring outcome?

There was no Democrat landslide following last week’s mid-term elections. Although, as the polls had suggested, the Republicans lost control of the House of Representatives, their setback was not as great as expected. The Grand Old Party  even strengthened its control of the Senate.

Now that this political uncertainty is behind us, the markets seem ready to bounce back, as is often the case after the mid-terms. 

However, there are still some bumps in the road as we head towards the end of the year. First, there probably won’t be any let-up in the trade war with China, given that it has bipartisan support in Congress. Second, there is likely to be opposition to any new reforms – like tax cuts – that would further expand the country’s deficit. And negotiations on the debt ceiling at the end of Q1 2019 could turn into a power struggle between the two main parties, poten-

tially leading to another government shutdown.

In terms of sectors, infrastructure should be boosted by the election outcome, as both sides have promised to increase spending in this area. Health care, which was last week’s best performer, should also do well out of a less decisive win by the Democrats, who tend to come down hard on the pricing practices of pharmaceutical companies.

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