A key focus for this week will be UK politics and whether there is sufficient support for a leadership challenge to Prime Minister May. The EC is also scheduled to respond to the Italian budget on Wednesday. If the response is too aggressive then this could see Italian bond spreads widen further as the EC will be wary of the potential contagion to other peripheral bond spreads and European banks. The US equity and bond markets will be shut on Thursday for Thanksgiving.

It is another relatively light week for economic data although the flash PMIs for November, released on Friday, will provide some guidance on the state of global growth. We will be particularly interested in whether the euro Area PMIs provide any evidence that growth is slowing any further there after a brief period of stabilisation.

Market and economic review

Risk aversion was back in vogue with macro concerns (growth and trade) compounding specific sectoral worries (focused on energy and technology) while Brexit fears ignited country-specific risk on UK assets.

After a couple of positive weeks, equity markets changed tack this week. The oil price continued to fall as fears of oversupply and weakening demand were stoked by a report from the International Energy Agency (IEA). This led the energy sector to be one of the worst performers this week and leaves the oil price down around 25% since early October. Technology stocks also remained under pressure with Apple, in particular, seeing sharp declines as new reports cast further doubt on demand for the new iPhone. Emerging market equities were relatively stable as headlines around potential US-China trade talks at the G20 supported sentiment.

Credit spreads also widened materially this week. An update from the CEO of General Electric – which is a significant issuer of corporate debt – about the difficulties that the company faces was one catalyst. The US high yield market was also negatively impacted by the fall in the oil price due to its exposure to drilling companies. The recent large issuance of corporate debt from Volkswagen also put a particular strain on the euro credit market.

Brexit: uncertainty increases despite the publication of the draft Withdrawal Agreement

On Wednesday, the British Prime Minister managed to secure Cabinet “approval” on the Withdrawal Agreement (WA) that she had negotiated with the European Union. A number of resignations from Cabinet members and Junior Ministers followed throughout Thursday. The hostile Parliamentary session that followed the Cabinet meeting indicated that the WA is highly unlikely to pass in its current form. There is also a risk that a leadership challenge may be brought by Conservative MPs before a Parliamentary vote on the WA is held. Where the UK goes from here remains highly uncertain. It could take Parliament several votes to approve the WA. If this fails, then an early election may be called. This would, however, need two-thirds of MPs to vote in favour. If this does not get sufficient support then another referendum might be called. This would, however, have to be proposed by the government and passed through Parliament. In addition it might need the EU to agree to an extension of the Article 50 timetable, which is far from certain and may depend on how the question is phrased in the referendum. Suffice to say there are many different permutations of events and it is very difficult to have confidence in which chain of events is the most likely to play out.

On Thursday, the resignations caused sterling (GBP) to weaken (versus the USD) towards the bottom of its recent range. Gilt yields also fell in response in the biggest one day move for over two years. The response of UK equities – at the index level – was relatively muted. The multinational-heavy FTSE 100 was up 0.3% although the more domestically-orientated FTSE 250 was down 1.3%. That said stocks that are reliant on domestic earnings or are potentially exposed to political risks from a Labour government were hit hard. This included Royal Bank of Scotland which could be at risk of a break up under a Labour government and homebuilders that are exposed to worsening UK consumer sentiment. The disappointing UK retail sales data that was released on Thursday added to fears that the Brexit negotiations were leading to a lack of confidence among consumers.

Geopolitics: more conflicting headlines ahead of the G20

The G20 meeting takes place in Buenos Aires on the 30 November and 1 December. A number of reports over the past couple of weeks have suggested that a breakthrough on US-China trade at the meeting might be possible. Positive and negative headlines continued to impact markets this week. Tuesday morning saw reports that the Chinese Vice Premier may travel to the US to prepare ground for a meeting at the G20 between President Trump and President Xi. Hopes for a breakthrough at the G20 were downplayed by the US Commerce Secretary on Friday when he stated that he expects to implement fresh 25% tariffs on Chinese goods on the 1 January.

The Italian government re-submitted its 2019 budget to the European Commission (EC) on Tuesday and did not change its budget deficit or growth projections despite EC concerns. This raises the odds the EC institutes the Excessive Deficit Procedure on 21 November.

Economic data: a relatively quiet week although US retail sales were strong

It was a relatively light week for economic data, with the release of US CPI for October on Wednesday being the highlight. The headline measure was in line with consensus and showed an increase to 2.5%. The core measure was a small miss and fell to 2.1%. Thursday saw the release of reasonably strong US retail sales data although the boost from the tax cuts is now fading and retail sales could soften into next year.

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