Monthly Review : November 2018

Monthly Review : November 2018



United States


The rout in stock markets, driven by technology stocks, was the main investor concern last month. While the SP500 declined more than 10% from its top, each of the 5 FAANG stocks ended the month in a bear market, losing 20% or more. To add to the dismal climate, President Trump revealed in an interview with the WSJ that it was “highly unlikely” he would accept Beijing’s request to hold off on boosting tariffs from 10% to 25%. On the economic data front, the picture was looking more encouraging, with wages rising at their fastest pace in almost a decade and continuing low unemployment.


Euro area


Italy’s government mounting defiance toward European institutions was at the centre of market participant’s attention in November, and weighed on investor optimism. Eurozone downside risks increased, with the publication of a weak PMIs, which sank to their lowest level since 2014. The economic data has been weak throughout 2018, but the ECB stuck to its view that the economy is going through a “soft patch”. However, the market is beginning to doubt this theory and that policymakers will have the ability to raise rates in 2019, as they said they expected they would.


United Kingdom

UK home prices fell to their lowest level since September 2012, as the prospect of rising rates and a disorderly Brexit made buyers wary. Those uncertainties also hampered business investment, which declined for a third consecutive quarter, making it the worst run since the last financial crisis. In a much commented report, published by the think tank Changing Europe, it was forecast the UK economy would be up to 5.5% smaller in a decade’s time than it would be if Britain remained in the EU. The study predicts regulatory trade barriers, a fall in immigration and higher public finance costs will drag on growth.


In a survey conducted by UBS, Swiss companies have expressed optimism about the economy in 2019. Most are planning a headcount increase as well as expanding investment. The most impactful risk they cited was a strong slowdown of the global and domestic economy. The strength of the Swiss Franc seems to be less of a concern as two thirds of the companies said they would not be affected by a prolonged strong or weak CHF. On the economic data front, inflation rose slightly compared to last month to 1.1% and unemployment remained at its lowest level in a decade at 2.4%.


Central banks:

Federal Reserve (next meeting: December 19th)

Despite strong economic activity, a declining unemployment rate and robust consumer spending, the Federal Open Market Committee maintained its target range for the Federal funds rate at its current level. Given the Fed’s upbeat assessment of the economy, it is however widely expected the Fed will raise the rate at its next meeting in December. On the dovish side, the Fed pointed out that slower business investment had moderated from the rapid pace witnessed earlier this year, even though tax cuts implemented by the Trump administration were expected to boost business spending.


European Central Bank (next meeting: December 13th)


Mario Draghi delivered a speech at the Frankfurt European Banking Congress in which he assessed the outlook for the Eurozone economy. The speech was generally positive about future prospects and he said “There is certainly no reason why the expansion in the euro area should abruptly come to an end.” On the dovish side, he noted that “if firms start to become more uncertain about the growth and inflation outlook, the squeeze on margins could prove more persistent. This would affect the speed with which underlying inflation picks up and therefore the inflation path that we expect to see in the quarters ahead.”


Bank of England (next meeting: December 20th)


The Monetary Policy Committee voted unanimously to maintain the Bank Rate at 0.75%. The Bank however downgraded its GDP growth forecast for both 2018 and 2019 by 0.1% for each year with projections being now at 1.3% and 1.7% for the respective years, but point out that this outlook depends significantly on the nature of the EU withdrawal. The BOE indicates the monetary policy response to Brexit, whatever form it takes, will not be automatic and could be in either direction.


Swiss National Bank (next meeting: December 13th)

The Federal Council received, as every year, the President of the Swiss National Bank, Thomas Jordan, to discuss the economic situation and the Monetary Policy. Overall, the global economy continues to grow steadily, and the economy in Switzerland is also healthy. However, the risk of deterioration of the international situation has increased. Inflation remains low, and the situation on the currency market, fragile. The franc, meanwhile, remains at a high level. The President of the SNB also exposed the situation prevailing in the Swiss real estate and mortgage markets. The imbalances in these markets remain significant.



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Market issues:

■ Turkish inflation rose to 25.2%, more than analysts had expected. The reading, far above the Central Bank’s 5% target rate, is the highest inflation number in 15 years.
■ Growth forecasts for next year have been revised down for most of the world’s major economies. Global GDP is now expected to expand by 3.5% in 2019, compared with the 3.7% forecast in last May’s Outlook, and by 3.5% in 2020
■ Crude oil extended its slide in November to more than 30% from its October peak as output and stockpiles rose and sanctions on Iran were thought to be less impactful than previously estimated.
■ In the US mid-term elections, Democrats won the control of the House of Representatives as Republicans secured the Senate. A Democratic House will leave President Donald Trump without congressional support, making it tougher to implement his agenda. A divided Congress is likely to make the country more difficult to govern.
■ Mexico’s currency, stock market and bonds tumbled, as investor feared the State would get more involved in the private economy, after president-elect Andrés Manuel López Obrador held a referendum on the continuation of the construction of Mexico’s city new airport and also proposed to limit bank fees.
■ In Switzerland, voters rejected a referendum pushed by nationalists, which would have asserted the Swiss Constitution over international treaties. A “Yes” vote would have complicated its relation with the EU.


Credit Markets:


UBS CEO Sergio Ermotti bought for CHF 13m of UBS stock, in a strong vote of confidence in its own strategy.
Lumentum, a manufacturer of 3D sensing applications used in the iPhone facial recognition system, cut its Q2 2019 guidance citing “a request from one of our largest Industrial and Consumer customers for laser diodes for 3D sensing to materially reduce shipments to them“. The customer in question was speculated to be Apple, which provoked a sharp sell-off in the stock.
Nvidia Corporation, a designer of graphic processing unit, for the gaming and professional markets, has seen a decline in crypto-currency specific product and an inventory buildup in this segment. The company lowered its guidance which resulted in investors dumping the stock.
■ Carlos Ghosn, simultaneously Nissan Chairman, Mitsubishi Chairman of the board and Renault Chairman and CEO, and one of the automotive industry’s biggest figures, was arrested in Japan over allegations of financial misconduct. The arrest of Ghosn, who had been planning to merge the Japanese Nissan and French Renault carmakers, caused the stocks of the three involved companies to sell-off sharply and related credit spreads to widen.
■ In a control war between its two main shareholders, activist investor Elliott Management and French media group Vivendi, Telecom Italia appointed a new CEO, Luigi Gubitosi. The fifth CEO in the past five years was appointed by Elliott Management which won control of the board of the telecom giant over Vivendi in May.
General Electric was in in the middle of a storm as its USD 115bln debt load, coupled with underwhelming cash flows, cast doubt about its ability as going concern. GE’s credit spreads widened significantly, with investors fearing another downgrade.
General Motors attracted Donald Trump’s’ ire, after the car maker announced its plans to closes some US factories and and lay off workers. In a tweet, the US president threatened to cut subsidies the company receives.
Thomas Cook issued its second profit warning in two months, sending its shares more than 20 per cent down to their lowest level since 2012 and their bonds maturing in 2023 fell to less than 80 per cent of face value. The UK travel agent blamed the summer heatwave, tough competition and the failures of airlines Air Berlin and Niki.
■ Shares in British American Tobacco slid by more than 10 per cent, and credit spreads widened, after the US Food and Drug Administration drew up plans to ban menthol cigarettes. The FDA argues that they carry more health risk as they are more addictive, making it harder to quit. US menthol sales account for around 25 per cent of group profit.
■ The dispute between Rome and Brussels over the proposed anti-austerity budget is having a big impact on funding costs for Italian banks. UniCredit SpA issued USD 3 billion of 5-year senior non-preferred notes with a coupon of 7.83% in a private placement deal, compared with just 1% for similar Euro denominated notes sold in January.

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