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Political risk continues to dominate the GBP market. If the UK government can make progress on Brexit and with Citi’s economic surprise indicator at multi-month highs, the weak Pound is ripe for comeback gains. There is plenty of event risk this month, including the EU leaders’ summit. Our base case remains that a deal between the UK and EU will have to pan out - with GBP to rise afterwards. However, negative outcomes cannot be ruled out by markets - no deal, governmental collapse, fresh general election and Corbyn – although there should be more clarity by the end of the month.
The lead-up to the ECB meeting (25th) focuses on the possibility of a more hawkish rate path given recent comments from Chief Draghi. Slowing economic growth concerns are a weight, but hard data points to a continuation of above trend growth meaning September 2019 is likely to remain the earliest point for rate lift-off … unless evidence emerges that economic slack is being used up at a quicker pace.
The last of this year’s major EM election risk events will dominate the early October agenda, as Brazilians go to the ballot box to vote for their new President on the 7th October. The polls suggest that following the worst recession on record and after years of corruption and rising crime Brazilians want change. The country is split between the more extreme left and right of politics. The ineligibility of previous front-runner and jailed ex-President Lula and the stabbing of the right’s leading candidate Bolsonaro has made the outcome of this election full of uncertainty. The Brazilian Real was stuck in a 4.00-4.20/USD range over the last month. Risks remain for greater volatility and BRL downside, as latest polls indicate the election will be a run-off between Bolsonaro and Lula’s replacement Haddad.
US Earnings Season begins mid-month. Earnings quality will remain an issue as the EPS and revenue/operating profit profiles have widened considerably this year - the majority of earnings growth is not a result of sales growth. Share buyback plans, trade tariff impact, ability to pass on rising input costs and employee pay proposals (or lack of) are in the spotlight.
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“For portfolio investors, [portfolio flows] data from… EPFR… have a powerful appeal. According to one strategist, 'it is almost a crutch – they want to know the data, just because this is their business.'” –Source: Flows have powerful appeal, even as picture of the past, Financial Times