Monthly Review: September 2018

Monthly Review: September 2018

Economies:

 

As a specialist fixed income services company, bridport & co publishes a monthly review on bond market activity. Stay up to date with the main market events.
 
United States
 
The US has imposed tariffs on their biggest yet amount of imported Chinese goods, taxing USD 200bln worth of imports with a 10% levy and threatening to raise it to 25% should Beijing refuse to offer trade concessions. China retaliated with a plan to tax USD 60bln worth of US exports. The final reading for the second quarter GDP showed the economy grew an annualised 4.2%, the fastest rise in nearly four years. The solid number can be credited to strong consumer spending, exports and government spending.
 
Euro area
 
Swedish elections, where many polls predicted a radical change in the political landscape due to a rise in support of the Sweden Democrats, a nationalist party, resulted in an inconclusive result, with no clear winner with an outright majority emerging. The country now facing months of political gridlock. Further south, negotiations over the Italian budget and uncertainties about whether or not it would be within European Union rules were a vector of volatility for the markets.
 
United Kingdom
 
At the Salzburg summit, UK Prime Minister Theresa May Brexit plans were largely rejected by her European counterparts, resulting in greater chances of the UK crashing out of Europe without a deal. The prospect of a no-deal Brexit pushed exports to their lowest level in almost a year, according to the CBI industrial trends survey. Brexit has also put upward pressure on wages as the number of EU workers is diminishing. Annual CPI inflation increased to 2.7% in August, up from 2.5% the month before, deviating further away from the BOE 2% target.
 
Switzerland
 
The Swiss export focused economy grew 0.7% in the second quarter, topping forecasts. The biggest contributor to growth was manufacturing, which was supported by a somewhat weaker currency compared to recent years and capacity utilization at a level not seen since 2011. The State Secretariat for Economic Affairs raised its forecast for GDP growth in 2018 from 2.4% to 2.9%, backed by strong investment from companies and strong international demand. The group, however, warns that negative risks significantly outweigh positives and threaten the global outlook.

 

Central banks:

 
Federal Reserve (next meeting: November 8th)
 
The Federal Reserve raised its rate for the third time this year, a hawkish stance justified by a strong economy and low unemployment. The Central Bank indicated they would raise rates again in December and three more times next year. The Fed also raised its forecast for GDP growth for next year by 0.1% to 2.5%. Later the same day President Trump commented on the decision at a press conference, stating that “The US is doing great as a country, unfortunately they just raised rates because we are doing so well. I’m not happy about that.”
 
European Central Bank (next meeting: October 25th)
 
The European Central Bank left its key interest rate unchanged and confirmed it would end asset purchases at the end of the year. Later in the month, Mario Draghi, speaking in front of the European parliament in Brussels, described a “relatively vigorous” pick up in euro area underlying inflation. The remarks resulted in a rise of the EUR as well as Bund yields. ECB Chief Economist Peter Praet also raised the fact that the ECB needed to communicate on the future path of rates after the first hike which is likely to happen in one year’s time.
 
Bank of England (next meeting: November 1st)
 
The Bank of England’s Monetary Policy Committee voted unanimously in September to maintain the Bank rate at 0.75%, after raising it a month earlier. It reiterated that it expects to tighten monetary policy at a gradual pace but stressed its projections are based on “a smooth adjustment to the average of a range of possible outcomes for the United Kingdom’s eventual trading relationship with the European Union.”. The rate decision came two days after Governor Mark Carney extended his stay in the position until January 2020.
 
Swiss National Bank (next meeting: December 13th)
 
Without much surprise, the Swiss National Bank left its expansionary monetary policy unchanged. The interest the Bank applies on sight deposit remains negative at -0.75%. They still consider the Swiss Franc as being “highly valued” and clearly stated they will remain active in the foreign exchange market as necessary, without providing more detail. They assess the Swiss economic outlook as being favorable, but reiterated their concern on the mortgages and real estate markets.
 
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Market issues:

 
■    Emerging market currencies, and to a certain extent Sovereign bonds, were under harsh selling pressure this month,hit by rising investor fears that geopolitical tensions as well as a developing trade war would be unfavourable to their economies.

■    The Argentina Central Bank head, Luis Caputo, unexpectedly resigned for personal reasons, after only 3 months into job. He was replaced by Economy Minister Nicolas Dujovne’s deputy, Guido Sandleris.

■    Defying President Erdogan, the Turkish Central bank raised the one week repo rate by a staggering 625 basis points to 24%. The Lira surged as a result.

■    US stock indices, the S&P and Dow Jones, reached new highs in September, unaffected by trade war tensions, rising rates and volatile emerging markets.

■    The heavy rains deposited by Hurricane Florence on the East Coast of the US could cost insurance companies as much as USD 4.6 billion. However, this is much lower than forecasts of up to USD 20 billion before wind speeds eased over the Atlantic. US insurers are liable for wind related damage but flood damage is often excluded from insurance policies.
 

Credit Markets:

 

■    Tesla CEO Elon Musk’s ordeal continued, with senior executives resigning. Chief Accounting Officer Dave Morton quit the company after less than a month in the job, citing the level of public attention on the company. Gabrielle Toledano, the head of HR, said she will not return from a leave of absence. Later in the month, the Securities and Exchange Comission announced it was suing Elon Musk for misleading investors for falsely claiming he had secured funding for taking the company private.

■   Richemont, the Swiss luxury goods maker, named Jerome Lambert as CEO. The company abolished the role two years ago, in favour of an organisational strategy where divisional chiefs directly reported to the board.

■    Danske Bank, engulfed in a money laundering scandal for a few months, admitted that an internal investigation had found that suspicious payments amounting to EUR 200bln flowed through its Estonian branches between 2007 and 2015. This led to the CEO resigning.

■    Apple released its newest set of phones, its best-selling product. The strategy remains the same, with higher priced products that compensate a slower smartphones market growth.

■    Dubai’s flagship airline Emirates was rumoured to take over loss making Etihad. The deal would create the biggest airline when measured by passenger kilometres flown, a position currently held by American Airlines.

■    Comcast won its bid for Sky Plc against rivals 21st Century Fox and Walt Disney Co, with a USD 39bln offer. The broadcasting giant was seeking to strengthen its foothold in Europe, in an effort to counterattack growing threats from Netflix.

■    Gold mining company Barrick Gold Corporation agreed to buy Randgold Resources in an all share deal that will value the new company at USD 18bln. The new entity will hold 5 of the 10 biggest gold deposits.

■ Photo sharing Instagram app founders left Facebook over rumored growing tensions with CEO Mark Zuckerberg. The step down happens at a time when the social media mogul faces mounting challenges and criticism.

Vodafone, Europe’s largest mobile operator, sold EUR 4 billion of hybrid bonds across three currencies to fund a portion of its EUR 18.4 billion acquisition of Liberty Global’s cable operations in Germany and Eastern Europe. The blended debt and equity characteristics of these instruments will help Vodafone keep leverage within management’s target range of 2.5 to 3.0 times

 

bridport & co is a fixed income services company that provides advisory, execution and research to institutional investors. Read more on www.bridport.ch

 

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EUR Market

 
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GBP Market

 
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CHF Market

 
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USD Median D_Swap
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USD D_Swap Monthly Variation
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Fixed Income Markets Profitability

 
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Fixed Income Markets

 

Other Markets Profitability

 
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