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Brexit:Around 170 days to go before the Brexit deadline and there is a “smell of blood”. The PM is dancing to ABBA tunes but remains focus on her Chequers plan, which divided her Cabinet ministers and party, while also not fully being acceptable to the EU. In the meantime, UK large based corporations are worried about a“no deal”which is not good news for the UK economy.
UK economy:Annual Growth is now expected to be as low as 1.5%, well below BOE’s annual target of 1.7%: Inflation jumped to 2.7%, well above the 2% target and will impact current interest rate level: Unemployment held steady at 4.0%, a low not seen since 1975 while Wage growth picked up pace to 2.7%.
So, we are in a trade-off situation between lower unemployment and higher inflation (The Philips curve) but low growth combined with Brexit uncertainty and political tensions are all having a direct impact on £ performance. BOE willbe very temptedto raise rates in November but, in my view, will hold the rate at the current level until 20thof December.
Money Market fund managers(10/2018) £ weighted average maturity (WAM) is > 45 days (next BOE meeting 1/11/18) so market does not expect a rate increase.
EU:Inflation back up to 2.1% (2 % in August), unemployment down to 8.1%, (lowest since 2008) Euro zone PMI down to 53.2% but annual growth still expected to be around 1.5%.
Italy:From red to green and then back to red. Where is the budget going to go? The market is hoping for a quick resolution but in the meantime Italian 10 Year bonds are under pressure.
Germany:Inflation up to 2.2%,purchasing manager index (PMI) up to 55.9% and Growth on target to reach 2% in 2018.
Emerging marketsare affected by the strength of the $ and increase rates combined with rise of oil prices butBrazilis the winner with investors supporting the expected political change.
USA:2 different stories:
Economic:The US economy is firing on 8 cylinders with:Growthto reach > 3% in 2018, (4.2% in the second quarter).Unemploymentrate fell to 3.7% and is benefitting from this strong economy butInflationis rising above the FED 2% target and so is wage growth.
Political:This is where we have problems and the US November midterms will be a serious test on the President’s policies and actions.
Like it or not, Brexit is definitely impacting Europe on its policy, political and economic fronts. US economy is very strong and maybe even overheating, but its President is engaged in a number of political and social crises which could affect all of us. US Interest rates, wages and inflation are rising and government debts are getting more expensive with Emerging markets being the first collateral victims. In this context of rising rates and rising equity indexes something has to give away and I will expect a solid equity correction.
LIBOR £ 3m
Updated on 08/10/2018
Interest rates and markets:
BOE: On one hand, we have inflation pressure and wage growth, which should translate into another rate increase, but on the other hand, we have a tense political situation and Brexit issues with 3 month Libor at .80%. Wedo notexpect a rate increase at the next meeting in November 1st2018.
Fed: As expected, we had a rate increase at the September meeting. Current federal fund rate ranges from 2.00% to 2.25%. Next FOMC meeting is on the 7thand 8thNovemberbut the important one is 18th and 19thDecember with Economic data.
3 months $ Libor up to 2.408%. Today’s slope 3 months versus 10 years treasury up to 0.97 %, 2-year treasury up to 2.889% while the 10-year treasury after breaking the important 3% level is now up to 3.233% and rising. So, with unemployment down, inflation and wages up, the US economy needs to be controlled further.Weexpecta .25% rate increase at the December meeting.
ECB:Next ECB monetary policy meeting is 25thOctober. Although, rising inflation at 2.1%, above the 2% target and slower growth,wedo notexpect a rate increase in October 2018.
Equity:Markets, which are worried about rising interest rates and Volatility up to 14.82%, are suffering losses. It is worth noting that YTD, all of the major indexes, except FTSE 100, are still showing positive returns. As mentioned, we should be cautious and Cash could be a prudent strategy while expected corrections are happening.