Investors climbed a wall of worry last week but made little headway higher. The focus was on better earnings against the usual global economic and political concerns.
China produced a weaker GDP for 3Q than expected but announced stock supportive measures and further stimulus plans. Europe had another bout of Italian budget and political fears but no new pain for BTPs. In fact, the Friday Moody’s cut to Baa3 – the last rung of investment grade – removes fears of junk status for now and makes ECB reinvestment buying not an issue in 2019.
The UK had another disappointment with Brexit deals and the EU but nothing new for GBP. The Saudi intrigue over the death of Washington Post journalist Khashogghi continued to nag oil and technology as fears over sanctions remain in play but US actions were slow and inventories plentiful driving down the price of oil.
Next week, the easy money policies that have dominated since the great recession of 2008 are the focus as the BOC, ECB, Riksbank all meet to decide on rates with their forward guidance the key tool to watch. Last week brought the FOMC minutes and they were hawkish enough to spook markets but not enough to sustain a further move down in bonds as equities counterbalanced and the strange moderation of moves left everyone trading taking a moment to consider the next move.
Politics in the US continue to face the mid-term election risks and Trump continues to campaign, with weekend talk of a middle-income tax cut sweetener adding to the fears about deficits and the significant borrowing in the week ahead. All of which leaves equities treading water, rotating sectors without much forward progress to break out of the 2650-2850 S&P 500 range but with many expecting more volatility as the waves of doubt from last week all remain in play.
What Happened over the Weekend?
Italy and the Budget: Can’t ignore BTP higher yields effect on banks. “The increase in the (bond yield) spread, the amount of public debt banks hold and new European Union banking rules put the industry under pressure and may generate the need to recapitalizes the most fragile lenders,” the undersecretary for the PM, Giancarlo Giorgetti , told Italian daily Il Messaggero in an interview published Sunday. He also said that next year’s budget deficit may turn out to be lower than the proposed 2.4 percent of gross domestic output. Italian Leaders plan to stay with EUR and stick with budget. “As long as I remain political head of the Five Star Movement and as long as there is this government there is no will on our part to leave the European Union or the eurozone,” Mr Di Maio said on Saturday after the two leaders reached an agreement over the details of a tax amnesty policy that had caused friction within the coalition earlier in the week.
UK and Brexit: Raab open-minded about extending transition. “If we need a bridge from the end of the implementation period to the future relationship…I am open minded about using a short extension of the implementation period,” UK Brexit Secretary Raab told BBC TV. “It is an obvious possible route as long as it is short, perhaps a few months, and secondly that we know how we get out of it and obviously it has to solve the backstop issue so that that falls away then as a possibility.”
French Minister: EU can’t accept temporary Irish Border measures. “We have to have a definitive answer or at least no temporary measures which disappear and we don’t know what to do after that,” French minister for EU affairs, Loiseau told BBC TV. “This is something that has to be fixed by London … We are waiting for a workable solution coming from London.”
UK sees thousands march in London for “people’s vote” on Brexit. Young voters led the People’s Vote march to London’s Parliament Square, which supporters say attracted approximately 700,000 protesters, BBC News reports. The Metropolitan Police said it was not able to estimate the size of the crowd. “What’s clear is that the only options on the table now from the prime minister are a bad Brexit deal, or no deal whatsoever,” London Mayor Sadiq Khan, who joined the march, told the BBC. “That’s a million miles away from what was promised 2 1/2 years ago.”
Saudi and Khashoggi: Another version of his death, more pushback from US/EU/UK. The latest account, provided by a Saudi official who requested anonymity, includes details on how the team of 15 Saudi nationals sent to confront Khashoggi on Oct. 2 had threatened him with being drugged and kidnapped and then killed him in a chokehold when he resisted. A member of the team then dressed in Khashoggi’s clothes to make it appear as if he had left the consulate. After denying any involvement in the disappearance of Khashoggi, 59, for two weeks, Saudi Arabia on Saturday morning said he had died in a fistfight at the consulate. An hour later, another Saudi official attributed the death to a chokehold, which the senior official reiterated.
US President Trump calls Saudi explanation deceptive and “all over the place,” not satisfied. In a Washington Post article published late Saturday, the US President said that “obviously there’s been deception and there’s been lies,” when asked about Saudi Arabia’s account of the killing of Khashoggi inside their Istanbul consulate almost three weeks ago. “Their stories are all over the place,” Trump said.
US and Russia: Trump plans to pull US out of nuclear missile treaty. Speaking to reporters, Mr. Trump said Russia had “violated” the 1987 Intermediate-Range Nuclear Forces (INF) treaty. The US would not let Russia “go out and do weapons [while] we’re not allowed to”, Mr Trump said. “I don’t know why President [Barack] Obama didn’t negotiate or pull out,” the president said after a campaign rally in Nevada. “They’ve been violating it for many years.”
