Monthly Review : October 2019

Monthly Review : October 2019



United States

The US unemployment rate fell to a 50-year low of 3.5% in September after 136,000 net jobs were added according to the non-farm payrolls report. Although the manufacturing and retail sectors laid off some workers, healthcare and social services made the most new hires.  The US Treasury reported that the government’s annual budget deficit jumped to USD 984 billion in fiscal year 2019, the highest since 2012.  Lower tax receipts and higher military spending pushed the federal government deeper into the red despite solid underlying economic growth.


Euro area

The German government cut its growth forecast for next year from 1.5% to 1.0% on concerns international trade tensions will continue to disrupt exports.  However, economics minister Peter Altmaier maintained strong domestic demand, underpinned by rising employment and incomes, will help avoid any crisis. Eurozone inflation slowed to 0.8% in September, the slowest annual rise since November 2016. Consumer price increases were lowest in Italy and Spain at just 0.2%.


United Kingdom

Data from the Office for National Statistics suggests the UK will avoid a technical recession as growth in the services sector, which represents around 80 per cent of the economy, offset a slump in manufacturing over the summer.  The report indicated the economy grew 0.3% in the three months to August.  However, the ONS also revealed the number of people in employment dropped by 56,000 in the same period, driven by a fall in part-time workers, and earnings growth slowed to 3.8%.   With annual consumer price inflation holding steady at 1.7% in September, real wages remain on a solid uptrend.



The KOF Swiss Economic Institute lowered its economic growth outlook for this year and next in its Autumn Economic Forecast due to the deteriorating international environment.  It now expects the economy to expand 0.9% in 2019, down from an earlier projection of 1.6%, and 1.9% in 2020 (previously 2.3%).  The report highlighted weaker business activity in the euro area and global trade disputes which are likely to escalate beyond the US and China.  It also warned the recent appreciation of the Swiss franc will negatively impact the competitiveness of large sections of industry, particularly engineering, and the tourism sector.


Central banks:


Federal Reserve (next meeting December 11th)

The Federal Reserve lowered interest rates by 25 basis points for the third time this year on 30 October but indicated it will now pause to assess incoming data and geopolitical developments.  The decision was not unanimous and again two members of the FOMC dissented, voting to leave rates unchanged.  Chairman Jay Powell acknowledged that the ‘mid-cycle adjustment’ reflected weaker global manufacturing, trade uncertainty and subdued inflation but apparent progress on a US-China truce and less risk of a no-deal Brexit reduced the need to provide more insurance rate cuts.  Markets still expect the next move to be lower and to change direction, Powell noted that the Fed would need to see some persistent inflation above the target rate.


European Central Bank (next meeting: December 12th)

To some he was Super Mario, remembered for promising to do “whatever it takes to preserve the euro” and overseeing a six-year expansion which created more than 10 million jobs.  To critics he was closer to Bild’s depiction, Count Draghila, the first ECB president to cut interest rates into negative territory, thus penalising savers, as inflation repeatedly undershot the target rate.  Mario Draghi’s farewell meeting was as much about his legacy made difficult by a rare leak revealing that the bank’s monetary policy committee wrote to the president last month to advise against resuming the assets purchase programme.  Draghi reiterated in his final press conference that recent data justified a more accommodative monetary policy.


Bank of England (next meeting November 7th)

Governor Mark Carney threw his support behind the Brexit deal negotiated by Boris Johnson, stressing the importance of a transition period which can enable “the economy to pick up from quite a subdued pace.”  The BoE believes business investment is around 25% below where it should be because of the uncertainty and a deal should help it to rebound.  The governor wasn’t drawn on what impact a deal would have on monetary policy but futures markets have lowered the probability of a rate cut by next summer to 50-50.


Swiss National Bank (next meeting: December 12th)

SNB governing board member Andrea Maechler defended the bank’s negative interest rate policy at an investment conference in Zurich, asserting that it is the correct antidote for low inflation and slowing global growth.  The KOF Swiss Economic Institute expects the SNB will cut rates further before the end of the year, although markets are more sceptical, in part due to the fierce criticism from the Swiss Bankers Association.  The group’s latest report argues the franc is not overvalued and “it is necessary to pave the way for an exit from crisis mode.”


Market issues:


  • The Brexit saga continues. UK assets and the pound rallied strongly after Boris Johnson secured a new deal with the EU but enthusiasm was tempered as parliament withheld its approval, obliging the prime minister to send a letter to the EU to request a Brexit delay until 31 January 2020.  MPs subsequently voted 329-299 in favour of the deal but rejected the government’s timetable for implementing legislation.  The EU agreed to a three-month ‘flextension’ and MPs approved the government’s bill to hold early elections on 12 December which it hopes will break the political gridlock.
  • The US imposed tariffs on USD 7.5 billion of imports from Europe after the World Trade Organisation ruled that the EU breached its rules by providing financial support to Airbus. The list of goods subject to a 25% tariff effective 18 October include cheese, wine, single malt Scotch whisky, olive oil and tailored suits.  Although those targeted represent a fraction of all EU imports into the United States, USD 684 billion in 2018, the EU has made it clear it will respond with its own levies next year when the WTO is expected to rule on its complaint over US government tax breaks for Boeing.
  • Peronist candidate Alberto Fernandez defeated the incumbent Mauricio Macri in the first round of Argentina’s presidential election and will inherit an economy in crisis. Former leader Cristina Fernandez de Kirchner will assume the role of vice-president and the pair will immediately be under the spotlight of creditors who fear another default.  Macroeconomic conditions deteriorated rapidly during Macri’s four-year term, despite the assistance of a record USD 57 billion IMF programme, and a debt restructuring looks inevitable – the country’s “century bond” scheduled to mature in 2117 fell to 40 per cent of face value.


Credit Markets:


  • Office-share start-up WeWork received a USD 9.5 billion rescue package from its largest investor SoftBank in return for an 80% stake in the business. Founder Adam Neumann will be removed from the board and replaced by Softbank executive Marcelo Claure.  Prior to the deal, WeWork was expected to run out of money before the end of the year.  Its 7.875% 2025 bond fell to 80 cents on the dollar, with more than 10 per cent out on loan to short sellers, before a small recovery on the back of the news.
  • Moody’s put Vietnam’s Ba3 rating on review for downgrade after the government delayed payments on an undisclosed obligation. Although the ratings agency recognised there were no or minimal losses for creditors, it warned any gaps in the administration of procedures or systems within government could point to creditworthiness not consistent with a Ba3 rating.
  • AB InBev announced underwhelming third quarter results and lowered its annual profit forecast. The world’s largest brewer generated revenue of USD 13.2 billion, falling short of analysts’ expectations,  citing declining sales in China, loss of market share for Budweiser and Bud Light in the US and weaker currencies in key markets, particularly Brazil.  Shares tumbled 10 per cent and credit spreads widened.
  • Sunrise Communication’s CHF 6.3 billion takeover of Liberty Global’s Swiss cable business UPC collapsed after shareholders blocked the deal. German mobile phone reseller Freenet, which holds a 25% stake in Sunrise, and activist investors objected to the proposal first announced in February on concerns over the acquisition price and size of the rights issue needed to fund it – equivalent to around 130% of Sunrise’s market value.  Regulatory approval to create a major competitor to the incumbent Swisscom had been granted.
  • Pernod Ricard was upgraded by one notch to BBB+ by Standard & Poor’s, reflecting the strong financial performance and progress in reducing debt. The French spirits manufacturer has been successful in penetrating emerging markets, including China, India and Latin America, with faster growth potential and the premiumization of its brands supports higher margins.
  • Shop Direct (B2) was placed on review for downgrade by Moody’s after it revealed a GBP 241 million provision for PPI claims. The online retailer, which also provides credit to shoppers, paid out GBP 169 million of claims in the year to 30 June and faced a further 276,000 claims in August ahead of the PPI mis-selling deadline set by the Financial Conduct Authority.  The resulting increase in debt will push adjusted leverage above 8 x next year according to Moody’s, and its owners, the Barclay brothers, may be called on to inject more cash into the business.
  • Deutsche Bahn was upgraded by one notch to AA by Standard & Poor’s on expectations that it will be a major beneficiary of the Climate Action Programme announced by the German government in September. The state-owned rail operator will receive EUR 11 billion from the federal government over the next 11 years, VAT will be cut on long distance rail tickets and air travel surcharges increased.  In order to promote rail travel over others means of transport, the government will also invest in track infrastructure to modernize and expand the rail network.


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