Getting a divorce settlement through a bitterly divided Parliament was to be Theresa May’s biggest challenge for the fall of 2018 (see chart 2). Promises are made to be kept. The situation is very delicate. The British Prime Minister had to abandon the idea of convening her government today to approve a text on Brexit. Although Britain and the European Union have moved closer to an agreement that could be signed at the November summit, the momentum seems to be waning as opposition hardens in the country. Pressure is mounting for Theresa May to abandon her plan or face a catastrophic defeat in Parliament. Without any surprise, the pound dropped versus all its Group-of-10 peers (see chart 3).
October ended with a record drop in stock markets. Fortunately, over the past week, investors were able to take a break, benefiting from a welcome technical rebound. The MSCI Emerging Markets rebounded by 6.1%, the Swiss Market Index by 3.8%, the EuroStoxx by 3.0% and the S&P500 by 2.4%. Despite these excellent performances, their year to date performances remain clearly in negative territory, with the exception of the US markets.
The week begins as the previous one ended, with important political, economic and financial publications. Brazilians and Germans were called to the polls this weekend. Not surprisingly, the far-right candidate, Jair Bolsonaro, was elected President of Latin America’s leading economy with 55.1% of the vote (see WIF of 8 October 2018). During his televised speech, this former army captain promised to “defend the constitution, democracy and freedom”.
Once again, China’s economic growth slowed more than expected in the third quarter. The Gross Domestic Product (GDP) grew by +6.5% year-on-year, compared to +6.7% in the previous quarter. This is the slowest growth rate since the 2008 global financial crisis. As leading indicators are on a downward trend, the slowdown is expected to continue. The different confidence indices of purchasing managers are close to the 50 point-mark, which separates expansion from contraction in activity. Echoing this analysis, the International Monetary Fund (IMF) lowered its economic growth forecast for China next year. GDP growth is expected to increase from +6.9% in 2017, to +6.6% this year and +6.2% in 2019.
Today, Monday 15 October, Italy is due to submit its provisional budget for 2019 to the European Commission. With a budget deficit of 2.4% of Gross Domestic Product (GDP), well above the European recommendations for Italy, the institution could reject it, exacerbating the political crisis and putting pressure on the Italian bond market. As a first step, Tuesday 16 or Wednesday 17, Brussels could send a letter to “ask for explanations” to the government of Giuseppe Conte. This could then be followed by a one-week period of “dialogue and consultation” to try to get the Italian authorities to reconsider their decisions.
Since 2014, Brazil has been caught up in one of the most important crises in its history from which it is struggling to emerge. The Gross Domestic Product (GDP) of the eighth largest economy in the World (see chart 2), and the most important in Latin America, fell by 8% between 2014 and 2016, in complete decorrelation with the good dynamics of other major emerging countries, such as Mexico (see chart 3). As a result, inequalities are widening. After affecting 13.7% of the working population, the unemployment rate has stagnated at 12% for several years (see chart 4). Brazilians are seeing their purchasing power eroded, with wages rising at a slower rate than the cost of living, particularly in industry.
On Thursday evening, the Italian government set its deficit for the next three years at -2.4% of GDP, despite the risk of increasing its debt to one of the highest in the world. The Italian anti-system parties, Salvini’s League (far right) and Di Maio’s 5-star Movement (far left), won the deficit battle against the Minister of Finance, Giovanni Tria. To be clear: this is bad news.
The Brexit negotiations are at a turning point. There are several main actors in this debate. With the risk of stigmatising
the situation, let us say that there are those who wish:
▪ to keep the single market as strong as possible: the European Union members
▪ for a soft Brexit, in favour of close links between Britain and the EU: Theresa May, UK Prime Minister and leader of the Conservatives
▪ for a hard Brexit, in favour of a complete withdrawal of the United Kingdom from the EU: the Leave Means Leave platform and some Conservative party members
▪ for a new referendum: probably a majority of the Labour Party members
Since mid-May, the Swiss franc has appreciated by more than 6% against most of its counterparts. As a safe-haven, the Swiss currency has clearly benefited from the various international events that have prompted investors to adopt a risk-off approach. Resurgence of trade tensions, turmoil in emerging markets, fears about Italy’s solvency, the possibility of a no-deal Brexit: all these factors have pushed the Swiss franc to appreciate. The EUR/CHF exchange 2 rate, which was around 1.20 in April, is currently just above 1.12, a level that traders had not seen since the summer of 2017.
Growth in the main developed countries was good to excellent in the first half of 2018, most of them above their growth potential. Australia, Sweden and Switzerland, in particular, have recorded an annual growth rate of over 3% in Gross Domestic Product. The United States is not far behind with 2.9%. In Canada and the Euro Area, economic activity managed to remain above 2.0%. Only the United-Kingdom, which is struggling with Brexit, and Japan, which is still fighting against deflation, have a growth rate of less than 1.5%. Nevertheless, even these lower figures are still not in the red.