9th October 2018 Market Update
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?? USD – As a result of global trade conflicts, the IMF downgraded its global GDP forecast for 2019 from 3.9% to 3.7%, due to the rise in trade wars and vulnerabilities in various emerging market countries. In addition to this, as part of their report – the IMF estimate that global GDP may fall by 0.8% by 2020. Included in this calculation is the belief that US growth will decline from 2.7% to 2.5% in 2019 once parts of its fiscal stimulus slow down and as the effects of US – China tariffs take hold. Despite this, we have seen the Dollar strengthen this morning as 10-year Treasury yields have continued to climb – hitting a seven-year high. With higher Treasury Yields, investors are able to secure a higher guaranteed return than if they were to invest their cash in say, a high interest bank account. However, to do this, they must purchase Treasuries which are denominated in Dollars and as such, the greenback has remained well-bid; helping the US Dollar index to rise 0.2% to 95.933, remaining near the seven-week high of 96.127 achieved last Thursday.
?? GBP – This morning saw the release of the Bank of England’s latest Financial Policy Statement, as part of which the BoE has called on the EU to do more to help protect cross-border financial services from Brexit risks. As well as this, they highlighted their concerns around the rapid growth in lending to risky UK businesses with £31bn worth of leveraged loans being granted to highly indebted companies in 2018 alone. Whilst this should set some alarm bells ringing, it is also indicative of a market environment in which there is clearly a greater risk appetite, despite Brexit concerns. In more positive news, the FPC believes that the UK banking system would survive a ‘disorderly, cliff-edge Brexit’ as it continues to review estimates of possible ‘worst-case’ economic outcomes. Looking ahead today, parliament returns from its 25-day conference break with Sterling investors keen to hear from Brexit secretary Dominic Raab, while Northern Ireland political leader Arlene Foster travels to Brussels for further Brexit negotiations.
?? EUR – Despite continued hopes for a solution in the Italian budgetary issue, it would appear that not everyone on both sides are as willing to play ball. Yesterday saw Italian PM Matteo Salvini speaking at a media conference (with French far-right leader Marine Le Pen) denouncing Jean-Claude Juncker, the European Commission President as an ‘enemy of Europe.’ Now I’m sure you will all agree, this makes for an interesting negotiating tactic – but the deputy PM is perhaps attempting to maintain a confrontational posture with the EU as it best serves his party’s political needs given the anti-EU sentiment in Italy at the moment. Whatever the reason, markets have seen an overall decline in the Italian economy and currently deem a one notch downgrade from both Moody’s and the S&P later on this month as ‘likely.’ Furthermore, the IMF report mentioned above also has Eurozone growth for 2018 falling from 2.2% to 2%, partly as a result of the slowdown in the German economy which has seen a fall in manufacturing orders and trade volumes. All of this has meant that this morning, the Euro is trading near a seven-week low against USD whilst continuing to trade at its lowest levels against GBP since mid-June.
USD: IMF forecasts global growth to decline, but increased Treasury Yields continue to keep the Dollar well bid;
GBP: Bank of England release minutes from Financial Policy Committee meeting on October 3rd;
EUR: Italian budgetary concerns alongside slowing Eurozone growth sees continued Euro sell-off.
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