Weekly Market Update 2018 11 20

Brexit Turmoil
A fresh wave of Brexit disruption descended on the UK last week as the Prime Minister unveiled her negotiated withdrawal agreement with the EU. The deal prompted a flurry of resignations and widespread calls for her to resign. Predictably, the political disruption and increased level of uncertainty caused a sharp correction in the pound, with the currency giving up most of its recent gains. Furthermore, within the equity market, domestically focused shares also suffered as investors placed a greater probability on a “no deal Brexit”, where the UK economy would suffer disproportionately. If a leadership challenge does not materialise, Theresa May’s deal will be ratified by EU member states this weekend and subsequently put to Parliament for a final vote. Based on current support for the deal by MPs, it appears unlikely that it will pass the parliamentary vote.

UK Labour Market
Mixed labour market data for the UK came out last week. Wage growth continued to accelerate, with the three-month average annual pay growth excluding bonuses rising to 3.2% in September, from 3.1% in August. The figure was ahead of expectations and surveys point to continuing growth over the coming year. Meanwhile, total employment posted a small increase of 23,000 in quarter three, in line with expectations. However, this was not sufficient to limit a rise in unemployment to 4.1%, from 4.0%. Furthermore, the 59,000 shift in part-time to full-time employment and subsequent increase in total hours worked has caused a decrease in worker hourly productivity. Accelerating wage growth and weak productivity will spur the Bank of England to continue with interest rate rises over the medium term.

Italy Budget
Tension continues to build between the EU and Italian government over their proposed budget. The EU commission has already sent the budget back once for reconsideration, and with little movement by the Italians, they are now contemplating disciplinary proceedings. In theory, this could amount to 0.2% of GDP rising to 0.5% if there was continued flouting of the rules. However, these measures have never been used before even though the majority of EU countries have broken fiscal rules previously. So, they seem unlikely to be used this time around. The more prominent issue for the Italians may be the market reaction to continued fiscal indiscipline. The country’s bonds have already seen their yields increase and there is scope for further pressure in the coming weeks.

Market Data
Index Open Close Change % Change
FTSE 100 7105 7013 -92 -1.29%
S&P 500 2781 2736 -45 -1.62%
Dax 11528 11341 -187 -1.62%
Cac 40 5106 5025 -81 -1.59%
Nikkei 225 22269 21680 -589 -2.64%
UK 10 Year Gilt Yield 1.48 1.42 -0.06 -4.05%