Last week brought further significant downside pressure for global stock markets, turning this in to a serious correction of the positive appreciation we have seen throughout 2018. The S&P 500 Index pulled back 10% from the highs we saw at the end of September and the Nasdaq is on course for its worst down month since 2008.
Whilst we are in earning season and slightly less positive forecasts from companies of the size of Amazon are contributing to this move, they are not the cause. The underlying concerns over the Trade War, Brexit, Italy and rising interest rates in the US remain the drivers behind this move. Markets have started slightly more positively this week after an early sell off in Chinese equities first thing. But with another big week of earnings (including Apple) as well as US employment data on Friday, plus the US midterm election hype likely coming at the start of next week, there is certainly scope for heightened volatility this week.
In the UK, the Pound traded consistently heavy, as we remain no closer to a tangible Brexit solution. Last week we really started to see the small surges in the Pound on optimistic comments by UK Government and EU sources lessen in size and frequency, with a very clear downward trend forming. Domestically, Theresa May came through a very tough internal 1922 meeting, where it was thought we may see an internal party vote of no confidence. Whilst there were Conservative party members writing letters of discontent, there were not enough. It was reported that she put in a strong performance at the meeting, but evidently she needs to start doing so in meetings with the EU if we are to meet Brexit deadlines. The UK Budget is scheduled for Monday afternoon where again progression and direction will be hampered by the uncertainties of Brexit.
It was a tough weekend for German Chancellor Angela Merkel’s CDU party, which scraped through the elections in the region of Hesse, with further votes were lost to both Green and Far Right parties. This again casts doubts on her abilities to lead with domestic pressures, plus the weighing issues in Italy and the UK. This has led to her on Monday announcing that she will not be running for re-election post 2021. In Italy, there was a slight glint of a positive, in that Standard and Poor’s chose not to cut their rating, but placed them on negative watch (when it was expected that they would follow the lead of Moody’s who cut them to one notch above junk just a week ago).
This week’s main events and data comes towards the end of the week, starting with the Bank of England’s Monetary policy committee meeting on Thursday. Whilst its is universally expected to keep interest rates on hold, the inflation report released at the same time and the manufacturing data earlier that day will be the ones to watch for the UK. In the US, the monthly release of Non-Farm Payrolls, Employment and Average Earning comes on Friday. The Non-Farm Payrolls number is expected lower at 175k, based on the effects of extreme weather. Naturally, we will see the build up to next week’s US midterm elections next Tuesday, so expect to see political posturing ahead of that.