Bedrock’s Newsletter for Friday 28th of September, 2018
28 September 2018


 Friday, 28th of September 2018

End of Q3 is today for the markets, as it is the last trading day of the month. Basically, we can summarize the quarter as continuing to be good for US equities, with all 3 major indices hitting record highs, and vastly outperforming other European markets and Emerging markets. Furthermore, Emerging markets have turned to the upside in the past few days, with Brazil’s Bovespa showing a +11.5% return in the past 3 months and the BRL going back below 4 to the USD. Russian equities are also up 8% and China is up 3.5% in September, reversing the negative trend of the past few months. Even the Japanese Nikkei was up strongly at +6% YTD, after the re-election of Prime Minister Abe.


In Fixed Income, the story is also more of the same. The USD Global Aggregate Index is flat for the year, vindicating us that returns are nowhere to be found in long dated US Bonds. Economic numbers in the US continue to be extremely good and strong, with consumer confidence hitting an 18-year high, while Jobless claims fell to the lowest level in 49 years! It is no surprise then, that the Fed met this week and raised Fed Funds Rates target range to 2.00-2.25%. The Federal Reserve hiked its benchmark interest rate by a quarter point and upped its anticipation for economic growth this year and next, and provided a road map of what lies ahead through 2021. That now takes the rate to where it was last in April 2008. This is the eighth increase since the Fed began normalizing policy in December 2015. Along with the rate increase, the FOMC continued to project one more hike before the end of the year and three in 2019. The latest step in the normalization process, along with the rate move, came with Wednesday’s statement, in which the Committee dropped language saying that “the stance of monetary policy remains accommodative.” Committee members also indicated that it’s likely the Funds Rate would remain for two years above what they term the long-term “neutral” rate that is neither restrictive, nor simulative. President Trump could not help vent about the outcome, again expressing his frustration with the Fed, this time just hours after the U.S. central bank raised interest rates. “We are doing great as a country,” Trump said Wednesday at a press conference in New York. “Unfortunately, they just raised interest rates a little bit because we are doing so well. I am not happy about that.”


2 days after the dust settled, the US$ is showing renewed signs of strength, as it should because of the widening interest rate differential between the US and Europe and Japan. The EURUSD pair dropped nearly 2 figures from 1.18 to 1.16, and the USDJPY pair jumped to nearly 114, a level not seen since the early days in January this year. Two-year Treasury yield stood at 2.82% while the 10-year yield remained above 3%, at 3.05%.


In Europe, news does not look so good – a rating downgrade of Italy is likely as a consequence of the new budget plan for 2019, says Peter Chatwell, head of rates strategy at Mizuho. Italy’s government is aiming for a fiscal deficit of 2.4% for next year, wider than the previous government’s plan. Given the likelihood of the downgrades, indexed investors “have reason to be cautious”. As a result, Moody’s Investors Service recently extended the review for downgrade on Italy’s ‘Baa2′ rating to get better visibility on the country’s policy direction. Peer ratings firm S&P Global Ratings is due to review Italy on Oct. 26.


In Germany, Angela Merkel’s grip on power took a blow on Tuesday when her party’s lawmakers ousted a close ally of the German chancellor as their parliamentary leader and replaced him with a candidate she had refused to endorse.

And in the UK, Brexit seems to be heading towards a no-deal. The U.K.’s exit from the European Union, scheduled to occur in March, is at a critical moment as negotiators try to conclude talks before November. But deep differences, on issues such as the Irish border, have raised doubts about whether an agreement will be reached. “I am very worried about the outcome of the Brexit process. We seem to be heading towards a no-deal situation,” Jeroen Dijsselbloem, who led the group of 19 Euro zone finance ministers for five years until January, said. And then, if Brexit were not enough, the political mess in the UK looks even worse. Standing on the stage in front of hordes of cheering activists, the man who wants to be Britain’s next prime minister had a blunt message for the country’s wealthy. “The very richest in our society have had tax breaks, giveaways, and tax havens,” Labour party leader Jeremy Corbyn said at a music and arts festival running alongside his party’s annual conference at the weekend. “I tell you what, they’re on borrowed time.” Millionaires are more concerned about the prospect of the most socialist government since the 1970s under Corbyn than anything else, according to their lawyers and tax advisers. Contingency planning for a Labour government has now surpassed any for Brexit.


In other news, the IMF and Argentina announced on Wednesday an arrangement to increase resources available to the South American country by US$ 19 billion. The agreement, pending IMF Executive Board approval, would bring the total amount available under the program to US$ 57.4 billion by the end of 2021, up from US$ 50 billion. Argentina’s recession-laden economy is struggling under steep interest rates and a currency that has lost around 50 percent of its value against the dollar this year. The governor of Argentina’s central bank, Luis Caputo resigned on Tuesday for personal reasons after taking the reins in June, the bank said in a statement – a surprise announcement for a country in the midst of talks with the IMF. The announcement sent the Peso tumbling.


In Brazil, a very important Presidential election is coming with the first round due on October 7th. Markets are clearly showing a preference for Bolsonaro, versus the far-left candidate Haddad, who replaced Lula in the ballots.


Amid all this “noise”, we remain confident that the US will continue to grow at a 3-3.5% growth in the next quarters, and that its economy will continue to outperform the rest of the world, thereby confirming our confidence in a slowly rising US$.


And while we are slowly entering the Autumn months, which are noteworthy for being the most dangerous ones in the Equity markets, we should remember that “Opportunity dances with those who are already on the dance floor”. We wish our readers a restful and sunny week end.



Market Weekly Highlights

Currencies & Commodities

  • The Greenback, which had been edging lower for almost one month on the back of US-China continued trade disputes matters with the Dollar Index DXY moving from the 97 highs to 93.90 recovered some strength post the FOMC decision to raise rates. The USD rallied across major currencies mainly driven by the Federal Reserve’s expected rate hike guidance for 2019 as well as the renewed Italian political risk which weighs on EUR; the DXY is currently trading at 95.15. However, the global trade disputes, US sanctions, latest Turkey and Italian contagion fear on Europe and Fed interest rate anticipations will remain present and add volatility to currency markets.
  • The EURUSD pair is trading lower for the week around 1.1600 on the back of the recent Italian government announcement for an increase of their fiscal deficit which led to a general Italian asset sell off and therefore stopped the EUR recent rally to 1.1800.
  • The CHF is the currency that lost the most this week, with the USDCHF pair jumping from 0.9540 to 0.9770, while the EURCHF trades at 1.1335 this morning.
  • The Pound edged lower this week, reaching 1.3050, still higher than 1.2660 reached in the middle of August but well below the 1.4375 top seen earlier this year in April.
  • The JPY is lower this week against the USD with the pair trading at 113.52 this morning, a level not seen since the beginning of January.
  • In EM, both the Russian Ruble and Turkish Lira are suffering amid US sanctions for the former and economic crisis and political turmoil for the latter. However, since mid-September the Russian Ruble has strengthened against the USD trading up from 70 to 65.70, as has the Turkish Lira which reached 7.23 in early August and is now at 6.00.
  • The Brazilian Real is flat for the week, now at 4.01, however it has lost almost 20% since the beginning of year amid lower appetite for emerging market currencies sparked by trade-war fears and rising US interest rates.
  • Bitcoin hit nearly 8’500 jumping 20% from the latest support found at just above 6’200, only to come back to almost 6600 now; still a big drop since the beginning of March.
  • Crude oil WTI is up this week to $72.14 per barrel, amid US dollar strengthening, Trade War escalation and mounting pressures from US sanctions on Iranian Oil; Brent is trading at about $82.00.

Fixed Income

  • The 10Y U.S. Treasuries yield, which had traded in a range during the last quarter of 2017 from 2.30% to 2.40%, crossed again 3.00% this month amid inflationary pressures and FED rate hikes.
  • The Japanese 10-year JGB yield has traded in a range from 0.020% to 0.060% for the past 6 months, after dropping from the 0.10% seen in early February; to then jump to 0.13% as BOJ tapers.
  • In Europe, the German Bund yield nearly doubled at one point this year, jumping from 0.40% to 0.80%, but then came back down as low as 0.20% on the back of Italian crisis fears. Now at 0.475%, slightly higher than where it closed 2017. Same for the French 10Y Yield which had crossed the 1% during February dropped as much as 0.60% in summer to trade now back higher at almost 0.81%.
  • In Peripheral Europe Italian 10Y yields are now trading in a wide range from 2.50% to 3.50%, currently at 3.18% well above the 1.70% low April levels and before their internal political turmoil. The Spanish 10Y yields trade some 170 bps lower than Italy at 1.50%- down from where it started the year at 1.61%.


  • Markets in the US are almost flat since last Friday and all positive for the Year 2018. NASDAQ is the strongest performer posting 16.49% positive yearly return. SP500 and DJ are also up, respectively by +8.99% and +6.96% yearly returns. The SP500 is currently at just above 2’910 and the DJIA just a couple of points below 26’440, while NASDAQ is trading some points above 8’040.
  • In Europe, markets are down for the week on the back of Italian sell-off pressures and mostly showing negative returns for the year so far with the exception of the French CAC 40 which is up by +3.96%. The Eurostoxx50, DAX, Spanish IBEX 35 and Swiss SMI are all down by -2.26%, -4.38%, -6.05% and -3.00% respectively.
  • In Asia, the Nikkei trades higher for the year so far marking +5.95%, while Hang Seng is down by 7.12%. BOVESPA turned positive for the year again showing +4.71% helped somehow by the lower BRL having jumped as much as 16% from the lows in June.


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