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This October and beginning of November, we saw the US Mid-term elections with mixed gains for President Trump and the Republicans, a day to remember with the 100 years anniversary of the end of the First World War and as expected a sharp equity markets correction and no further clarity on the BREXIT front.
Brexit: Less than 140 days to go before the Brexit deadline and there has only been more confusion about what will actually happen. Do we have a deal or not? Do we have a customs agreement allowing Britain to leave the EU and/or do we have a new referendum? At this stage, any clarity on what is going to happen after leaving the EU would be a benefit to the UK economy, as well as the SME’s and the financial markets.
UK economy:Growth up in the 3rd quarter but flat in September and a substantial slowing down in October. Annual growth to be as low as 1.5% well below BOE’s annual target of 1.7%.
Inflation back down to 2.4% by the end of September as food and drink prices declined. However, as wages are growing rapidly, it will lead to higher prices and will impact current interest rate levels. Unemployment held steady at 4.0% andwage growth picked up pace to 2.7%.
I have not changed my previous view that we have a typical Philips curve and I expect BOE to raise their interest rate on the 20th of December barring any dramatic BREXIT developments. It will again be a political and not an economic decision.
Money Market fund managers (11/2018) £ weighted average maturity (WAM) is around 40 days (next BOE meeting 20/12/18) and the market is favouring a rate increase.
EU: Inflation rose to 2.2% (2% in August and 2.1% in September), EU zone (19)unemployment down to 8.1%, (lowest since 2008) but Euro zone purchasing manager index(PMI) continues to fall down to 52.7%, the lowest for 25 months. Quarterly growth is down, mostly due to Italy, and annual growth is now expected to be 1.5%.
Italy: Confrontation with Brussels about the deficit and expected growth. We are in a standstill situation, and Italian 10 Year bonds continue to rise to 3.42%.
Germany: Inflation up to 2.3%, PMI down to 52.2% and currently growth expected to drop below 1.9% in 2018, a strong correction from early expectations of around 2.2%.
So, the Euro zone is entering a difficult period with issues among others in Italy and Germany, the latter combined with change of leadership. This is likely to force the ECB to change its policy and raise rates in early 2019.
USA: Mid-term elections was a mixed bag of results with the Democrats finally taking back the House, but we did not see the expected“blue wave.”
Economic: The US economy is still being given a bullish verdict with current growthup to 3.5% and annual growth targeted to reach 3.1% in 2018.
Unemployment: unemployment held steady at 3.7% but wage growth and inflation increased to 3.1% year-on-year and 2.3% respectively.
LIBOR £ 3m
Updated on 12/11/2018
Interest rates and markets:
BOE: As expected, there was no rate increase in November down to political decisions rather than economical ones. However, with 3-month Libor rising to .85% we do expect a rate increase at the next meeting on 20thDecember 2018.
Fed: To little surprise, there was no rate increase on the 7th and 8th November but all focus is now on the 18th and 19th December FOMC meeting.
3-months $ Libor now at 2.62%. Today’s slope: 3-months versus 10-year treasury around 0.90%, 2-year treasury up to 2.928% while the 10-year treasury remains above 3% level to 3.184% and rising. So, with unemployment down, inflation and wages up and a flattening yield curve, the Fed is likely to continue its tightening policy. Weexpecta .25% rate increase at the December meeting.
ECB:Next ECB monetary policy meeting is on the 13th December. Although ECB is unlikely to change its policy by the end of 2018, we now anticipate a change in 2019. However, we do not expect a rate increase in December 2018.
Equity: As expected, Equity Markets saw a strong correction due to rising interest rates and Volatility up to 17.36% (up 57% YTD). All the major indexes have been affected with the FTSE 100 and the CAC 40, YTD. Now in negative territory and both the Dow Jones and S&P down, albeit still yielding positive returns YTD. As mentioned, Cashdeposits remain a prudent strategy.
UK & Europe: CAC 40 at 5,106 down 0.5% and 3.9% down YTD. FTSE 100 at 7,105 down 0.5% and 7.6%YTD.
USA: Dow jones down 0.8% at 25,989 but still 5.1 % up YTD and S&P down 0.9% to 2,781 but still 4% up YTD.
$/£ at 1.31 up 0.9% but down 3.1% YTD. There is a growing demand for £ put (bearish bet) indicating that investors are worried about Brexit’s outcome and are now expecting a deeper drop in Sterling. Any good news on Brexit will help the £.
€/$ at 1.15, which could drop to 1.13, for the first time since June 2017, due to the standoff between Rome and Brussels and an expected widening of the yield spread between Italian and German government bonds. Any concession by the Italian government will reverse this decline.
£/€ at 1.15: up 0.4% and 2.1% YTD. Mostly down to the € and its issues over Italy’s budget. Unlikely for the moment, but Sterling could rise depending on any good news regarding BREXIT.
Gold at 1208: weaker and down 7.5% YTD. Gold is still in a bearish trend and could dip below 1,200.
About Banks: October/November 2018
RBS to launch digital bank for SME’s with current account and cash flow forecasting.
Handelbanken receives UK bank licence.
CO-OP bank operating profit of £14.3M in the first 9 months of 2018 and net pre-tax loss of £87M due to restructuring costs
Oaknorth challenger bank has completed a loan to ICG-Longbow, the commercial real estate lender. the money will be on-lent to property investors. This is another sign of Challenger bank taking on heavy weights such as Investec and Close Brothers. It is also believed that Saudi Arabia Sovereign investment fund is investing into Oaknorth and could become a major stake holder of the digital bank
Monese digital banking is announcing a move into business banking in launching accounts for young companies and entrepreneurs across the UK and the rest of Europe. Monese closed its series B investment round with $60M with investors such as Kinnevik, Augmentum Fintech and Paypal.
BNPParibas first bank in London to cut staff in IB as a result of the recent market turmoil.
MONZO to offer users rainy-day saving pot. It will be managed by Investec and pay customers interest of up to 1% per year.
NUTMEG the online wealth manager is offering a low price fixed fee model, a shift away from the traditional IFA’s.
Santander net profits rise on strong performance in Brazil and Spain with net profit up to €1.99Bn in the 3rdquarter and up by 13% to €5.7Bn for the nine months to September. UK profit year-on-year was down by 9% to €1.07Bn for the first 9 months.
Standard Chartered, net profit $1.06Bn in the 3 months to September despite rising concerns about the firm’s emerging market being affected by the US/China trade war.
Lloyds bank to create 8,000 jobs with a focus on digital financial services and cut 6,000 jobs in its banking services.
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