Market Update: Pound and Domestic Shares Rally as UK and EU Agree Withdrawal Deal

Monday 21st of October 2019.

LAST WEEK – KEY TAKEAWAYS


Brexit: UK and EU agree withdrawal deal

• The pound hit its highest point in five months against the US dollar as the UK and EU agreed a Brexit withdrawal deal, although it handed back some of those gains when the Democratic Unionist Party (DUP) said it would oppose the deal;
• The government cancelled a meaningful vote planned for Saturday after MPs backed an amendment designed to avoid an accidental ‘no deal’ Brexit;
• The Prime Minister consequently had to request a delay to the Article 50 deadline, but he did not sign the letter and wrote another one saying he was not in favour of an extension.

• Omnis view: The fading prospects of a ‘no deal’ Brexit boosted the FTSE 250 index of mid-sized companies which are particularly exposed to the UK economy. Boris will try to hold a vote on the withdrawal deal early this week but whether or not he can secure a majority remains to be seen. Opposition MPs pledged to seek a referendum to let the UK public make the ultimate decision.

Trade: Doubts emerge about latest truce

• US shares paused as White House officials warned that tariffs- taxes on companies importing goods from abroad- on US$150 billion of Chinese products planned for December would come into force if China did not commit to the limited trade deal agreed the week before;
• Meanwhile, the International Monetary Fund (IMF)- a global institution which promotes financial cooperation- blamed trade tensions between the US and China for lowering its forecast for worldwide economic growth in 2019.

• Omnis view: The fragile nature of the trade truce suggests there may be further uncertainty before a potential meeting between US President Donald Trump and his Chinese counterpart Xi Jinping at the APEC (Asia-Pacific Economic Cooperation) Summit in November.

US: Hesitant consumers raise prospect of interest rate cut

• Spending by US shoppers experienced its biggest decline in seven months in September, according to data released by the US Department of Commerce.

• Omnis view: A slowdown in consumer spending increases the chances that the Federal Reserve (the US central bank) will cut interest rates at its next meeting at the end of October.

Asia Pacific: Trade tensions weigh on Chinese economy

• Chinese shares sank as figures showed the country’s economy grew by 6% in the third quarter of 2019, its slowest pace in nearly thirty years1;
• There was further bad news for the Chinese economy as exports- goods produced in China and sold abroad- fell in September to the lowest level since February.

• Omnis view: Trade tensions with the US are weighing on the Chinese economy, which increases the pressure on Beijing to find a resolution.

Japan: Trade deal signed with US

• Japanese shares rose as the country agreed a limited trade deal with the US, which cut tariffs on US agricultural and Japanese manufacturing goods and delayed tariffs on Japanese cars.

• Omnis view: Japanese markets welcomed the trade deal due to the significant impact it should have on the country’s economic growth.

Companies: US banks get earnings season off to strong start

• Several American banks reported corporate earnings (company profits) for the third quarter of 2019- JP Morgan, Bank
of America, Citibank and Morgan Stanley beat expectations, but Goldman Sachs fell short;
• Shares in Netflix rallied after the streaming service beat earnings expectations in the third quarter, although US
subscriptions fell below estimates.

• Omnis view: Earnings are one of the main drivers of the stock markets, and US banks set the tone for earnings
season, so these results are encouraging. However, overall earnings among US-listed companies are expected to
decline by 4.6% according to research firm FactSet2.

LOOKING AHEAD - TALKING POINTS

Monetary policy

• Thursday- European Central Bank interest rate decision.

Corporate earnings

• Amazon, UK banks Royal Bank of Scotland and Barclays and Caterpillar- a bellwether for the global economy because it is one of the leading producers of equipment for the construction industry- are among the companies reporting corporate earnings this week.

1 http://www.stats.gov.cn/english/PressRelease/201910/t20191021_1704329.html

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