The US and Canada reached agreement to replace the North American Free Trade agreement, of which Donald Trump has been a long-time critic. The last minute deal was reached after the US and Mexico announced a trade pact in September, threatening to leave Canada out. The US economy grew at an annualized rate of 3.5% in the third quarter, the sixth consecutive quarter with growth above 2%. The trade deficit continued to widen, despite the Trump administration “America First” policies.
Italy was again in the spotlight this month, with the European Commission rejecting the Italian budget and asking the government to revise its plans. Members of the same government continued to be defiant towards European institutions, putting selling pressure on Italian debt. As a result, rating agencies are growing more concerned with the country’s creditworthiness, with Moody’s downgrading the debt one notch and S&P lowering its outlook.
Helped by the lowest level of unemployment since the mid-70s, wage growth accelerated to 3.1%, the fastest pace since 2009. Wages are growing faster than prices, a relief for households which were hurt by rising inflation following the Brexit vote. On the other hand, after a strong summer, retail sales fell by 0.8% in a month, twice the analyst expectations, casting clouds on already strained high street retailers. House prices stalled around the UK and the outlook remained gloomy, as a warning from Mark Carney to Theresa May that house prices could plunge by more than 30% should a no deal Brexit take place.
Talks between Switzerland and the EU stalled this month, as the two sides did not find common ground in order to bundle a multitude of bilateral agreements into a single framework. The Swiss Stock Exchange has been granted temporary equivalence under the MiFID II regime, which will expire at the end of this year. Should an agreement not be found, the Swiss stock market would be off limits for EU traders. The KOF leading indicator, which measures the future trends of economic activity in Switzerland, reversed back to its long term average, suggesting that the Swiss economy is likely to grow with average rate in the coming months.
Federal Reserve (next meeting: November 8th)
The Fed attracted Donald Trump’s criticism again this month, as he declared that he thinks “the Fed is making a mistake. They are so tight. I think the Fed has gone crazy”, blaming the current Central Bank tightening cycle for the sharp equity market selloff. The comments raised concerns about the Federal Reserve and more generally on the importance of Central Bank independence. Top officials, including Mark Carney as well as Mario Draghi stressed the crucial role played by independent Central Banks in modern economies.
European Central Bank (next meeting: December 13th)
In a widely anticipated move, the ECB left its benchmark rate unchanged, confirmed its intention to halt net asset purchases at the end of December and that rates are going to stay at their present levels at least through the summer of 2019. More was awaited from the Q&A session, especially about the ECB stance on Italy and on whether or not the current situation would influence their plans. Mario Draghi while acknowledging the tense situation did not give any sign the Central Bank would intervene and said he was confident a deal would be reached with the European Commission.
Bank of England (next meeting: November 1st)
At its meeting the Financial Policy Committee monitored the risk of disruption to financial services under the different Brexit scenarios. The Bank warned on the risks posed by derivative OTC contracts. In a recent assessment, the ECB estimated that EU-based firms cleared 90% of their interest rate swaps in the UK, which represents today a GBP 69 trillion market, where GBP 41 trillion have a maturity after March 2019. A no-deal Brexit would make it difficult to clear contracts and seriously disrupt the derivatives market.
Swiss National Bank (next meeting: December 13th)
In an interview with the Sonntags Zeitung, Sergio Ermotti, the UBS CEO expressed criticism of the SNB. He is surprised that the Central Bank stability report addresses the growth of big banks as a risk. “I think the negative interest rates and the size of the National Bank’s balance sheet are the major risks.” The CEO also thinks that the low interest rate policy endangers retirement provisions. Above all, the pension funds would be encouraged by the low interest rates to give mortgages on very favorable terms. This could result in major losses in the event of a crisis.
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■ Turkey inflation rose to 24.52% YoY, giving concerns that the Central Bank did not do enough to contain rising prices. This number is five time the bank’s official target.
■ The Mexican Peso and the country financial assets plunged after the newly elected president, Andres Manuel Lopez Obrador, scraped a USD 13bln airport project, which was more than a third of the way to completion. The decision came after a vote launched by the president elect.
■ Brazil elected a new president, Jair Bolsonaro, dubbed as “The Trump of the Tropics”, who is often described as a far-right politician, and who won his campaign with the slogan “Brazil before everything, and God above all”. Perceived as being pro-business, Brazilian assets rose as a result.
■ Real estate investment and home sales in China fell last month, for the first time since April, increasing the downside risks for the world’s second largest economy.
■ Sri Lanka is on the brink of a political crisis, as the President fired the Prime Minister and suspended the parliament, breaking up an already fragile coalition. The country’s sovereign bonds fell as a result. Government debt is about 79% of GDP and remains amongst the highest in the EM space.
■ Comcast raised USD 27bln in debt through bonds spread across 12 tranches in order to fund the Sky Plc acquisition. The orderbook amounted to USD 85bln. The deal is the second largest this year, behind the CVS deal and the fourth largest in history, behind Verizon and Anheuser-Busch.
■ S&P downgraded General Electric to BBB+ from A. This came after Moody’s placed GE’s credit rating under review for a possible downgrade. The rating actions came after GE removed its CEO and announced it would take a USD 23bln charge from its power business.
■ Aston Martin debuted its London listing on a mitigated note, as the share sold off after its initial public offering. The luxury car maker was initially valued at GBP 4.3bln, at the low end of the spectrum.
■ Jaguar Land Rover, fully owned by India based Tata Motors, reported weak sales results for September. Sales were down 12.3% yoy and declined by 46.2% in China.
■ Ceva Logistics, a transportation and logistics company, quoted on the Swiss Exchange, faced intense takeover speculation, as it first rejected a bid from Denmark’s DSV and further received a takeover bid from its majority shareholder CMA CGM.
■ Sears Holding, the US department store chain, once a giant retailer, filed for Chapter 11. A decision that follows years of declining revenues and a growing debt burden.
■ Standard and Poor’s upgraded Netflix Inc to BB- from B+. The upgrade was followed by a USD 2bln bond issue, maturing in 2029, which is denominated both in USD and EUR.
■ Amid a struggling auto sector, VW published flat operating profits and affirmed its full year guidance, helped by a better than expected Porsche performance. Hybrid bonds, a favorite among yield seeking investors, rose as a result.
■ Alpiq, the Swiss electricity producer, announced it would not redeem its CHF 650m perpetual hybrid bond. The company said the decision was “in line with its financial strategy”.
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