Weekly Market Update: Fed cuts rates, Sterling rises on news of a general election

Read our full Market Update Week 44

Market Update

Global stocks rose +1.3% in local currency terms and +0.4% in Sterling terms in a positive week for risk assets. Sterling rose against major currencies, up +0.9% against the US Dollar and +0.1% against the Euro, against a backdrop of polls suggesting the Conservative Party hold a lead that could deliver a majority government. US stocks rose +1.5% in US Dollar terms and +0.6% in Sterling. European stocks were slightly positive, gaining +0.5% in Euro terms and +0.4% in Sterling. UK stocks were the notable exception to the trend of rising equities, down -0.3%. Globally the Healthcare sector was the best performing, with IT and Industrials also performing well. Meanwhile Energy was the worst performing sector globally, although in both the UK and Europe the worst performing sector was Financials. Yields fell with the UK 10 year Gilt, the US 10 year Treasury and German 10 year Bund all ending the week at lower yields. Gold rose in US Dollar terms +0.7%, although this corresponded to a -0.3% fall in Sterling terms, whilst Oil fell in both US Dollar and Sterling terms.

CIO Analysis

US stocks reached new highs on the back of slightly better than expected, yet still negative, earnings data, buoyed by good results in Healthcare. But the major news for British investors came out of Westminster, where Parliament acquiesced to the PM’s demand for early elections to be held on 12 December in an attempt to break the Brexit deadlock. These elections are very unusual in the sense that they are seen as a referendum on the shape of Brexit. A few things investors should remember:

1. Uncertainty is very high. Not only because in a “first past the post” system the popular vote does not exactly correlate to number of seats, but because several parties have positioned themselves against one issue: the shape of Brexit.

2. This appears to be a race between three parties (Conservatives, Labour, Lib Dems) and a potential power broker (Brexit Party).

3. There are manifest negative correlations between parties that represent similar Brexit views: Conservatives gain vs the Brexit Party when they harden their stance, and vice versa, and Labour gains vs Lib Dems when it suggests that it will delay Brexit or put it to a second referendum.

4. Early polling is only indicative. In 2017 Jeremy Corbyn beat expectations (an initial 20% difference) and cost the Conservatives their majority.

5. The results in Northern Ireland and Scotland might also be significant for the future, as many of the votes might be seen as a referendum on the power of Westminster.

6. What is at stake is not a ‘trade deal’ but rather a transition deal. No Conservative majority increases the likelihood of either Hard Disorderly Brexit or No Brexit, versus a Hard Orderly Brexit if they do win, which might usher a quicker trade deal.

7. The Pound still has a negative correlation with Hard Brexit. The ‘harder’ the Brexit, the lower the Pound. 8. With a clear and solid majority, the next government might be the one to shape Britain for the next generation

-David Baker, CIO

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