A strange week for equity markets

A strange week for capital markets, the Nasdaq index which has led so much of the rally this year paused for breath. The oil price remains resilient as OPEC and Russia agreed to extend its oil cuts until the end of 2018. The Dow Jones posted its biggest weekly gain for almost a year, on expectations that the tax reforms are becoming closer to being agreed.

The political risk seems to be coming to the fore again as Michael Flynn, Trumps former national security advisor pleaded guilty to lying to the FBI over links to Russia. ABC news reported that Flynn would testify that Trump asked him to reach out to Moscow after last years November election. The FTSE 100 which has been stuck in a trading range of 7550 and 7200 for quite some time is rapidly approaching the bottom end of that range as the pound hit 1.35 again against the US dollar. Likewise, the pound had a good week against the euro, back above 1.13. Hopes that breakthroughs are being made regarding the Brexit negotiations, however, there is also concerns the government is possibly caving in a little too easily, in an attempt to move the talks on to negotiate a trade deal. We also pointed out in our week ending comments that there are some signs that the bearish sentiment towards the UK economy is overdone, which may also have helped the currency.

Despite US markets continuing to trade close to record highs, the Vix index has also been rising, this can be a warning sign for equity investors a bigger correction may be ahead. The upgrade to the estimate for third quarter GDP for the US economy from 3% to 3.3%, had a minor impact on the dollar or the US bond market as the spread between 2 and 10-year US Treasuries remains close to 0.5%. The start of the month sees the release of the previous months Purchasing Managers surveys, manufacturing indexes, including the UK suggested that the global economy is on a strong footing. The FT reports that Factories across the globe were their busiest for years in the month of November.

Looking to the week ahead, Brexit will remain in the news. Tax legislation and Michael Flynn will probably continue to make financial headlines. Congress also faces a Friday deadline to extend spending authority or face a shutdown. It may be that the tax reforms and the extension of the debt ceiling may become interlinked in the week's negotiations.

Posted on December 4, 2017 .