Markets

The S&P500 rose to close to its all-time high last week as a stellar reporting season, characterised by strong growth in earnings, revenue and margins, drew to a close. Momentum indicators, corporate data and economic forecasts, however, indicate the end of this phase and the start of another which is likely to see the emergence of new bulls, i.e. new sector leaders in the coming quarters. The chart above shows cyclical sectors prominently, but the price performance of sector ETFs over the past month indicates that defensive sectors are rebounding and is an indication that the fight for market leadership is on.

As we move toward the year end, some major themes will dominate. The EU and UK have to strike a deal on Brexit well before the formal exit date of 29th March 2019 to provide both parties time for ratification. The Bank of England has started to raise interest rates to counter a tight labour market and just above trend growth, but the direction of Sterling will largely be dependent on the type of Brexit agreed which is far from clear.

The trade war between the US and China is set to continue as many analysts suggest that China has little more to offer in terms of concessions, but the Trump administration seems likely to continue its higher tariffs policy. A survey from the Atlanta Fed shows few companies have changed their investment plans as a result of the tariffs and hence US expansion should not be affected.     

The mid-term US elections on 6 November is important because if the Republicans win both the House and the Senate, it will allow the Trump administration to focus more on domestic policy and pursue his electoral promises. This might provide relief to trade tensions and boost global growth.