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News for November 6

There is a huge number of businesses unpleased with the U.S. sanctions. Trump’s administration threatened to shut down the SWIFT payments system for Russian state banks providing transactions in dollars. The U.S. limitations on Iran oil trade hurt several large European corporations. Turkey is also angry about the latest measures against the currency. All those factors forced several countries to discuss an alternative to SWIFT. A Special Purpose Vehicle was planned by Eurocomission to be created in November, providing a bypass of the limitations. That idea was widely supported in Russia which is suffering from potential negative consequences of the sanctions. However, not a single EU country agreed to host such an SPV due to the fears of being pressured by the U.S. Secretary of State and worsen the relationship with the largest economy in the world. The project seems to be halted amid the lack of progress despite the Russian willingness to join such an alternative payment system.

Source: Sputnik International

German political system is also under the threat as Cristian Democratic Union failed to win the Landtag elections in the State of Hesse. The problem of fewer seats obtained might reflect on the ruling coalition of the government. Angela Merkel, the leader of the CDU party since 2000, announced that she will resign from the position on the worse-than-expected elections result, despite the total number of CDU seats at 27.2% compared to 38.7% five years ago. European single currency reacted by the decline versus its major peers. The Euro exchange rate fell from 1.1410 to 1.1359 dollars per one Euro on the Merkel’s announcement published by leading news agencies. However, German Chancellor decided to stay in the government position, refusing to take part in CDU party President elections in December this year.

Morgan Stanley is concerned about the U.S. inflation. The key risk for the equities market is that the Federal Reserve might fail to support U.S. stock indices from the inflationary pressures. The current situation is completely different compared to 2010-17 for the vast majority of central banks including the Federal Open Market Committee. Morgan Staley’s market strategists wrote in their overview that it is getting harder to keep publishing dovish statements in the environment of rising inflation, leaving the monetary policy at historically low levels. This is also the reason why Morgan Stanley recommends to stay out from buying U.S. high-yield assets despite the attractiveness of current prices, the lowest level since February 2016 after S&P 500 benchmark declined by almost 9% in October 2018. New difficulties are expected to drive the stock markets price action in 2019 as the economic growth is forecasted to slow down with the same level of the inflationary pressure to remain weighing on consumers sentiment and corporate profits. According to the bank’s economists observations, U.S. dollar index, as well as the price of gold and oil, have much worse performance within such a scenario compared to an option when both economic growth and inflation accelerate at the same time. The short-term debt securities would face a struggle in that case and some of the fixed-income market players might consider shifting to the regions with lower levels of the interest rates, such as Japan for example, as the hedging strategy.

The U.S. Federal Reserve is going to keep tightening the financial conditions despite the stocks market crash. Two Federal Open Market Committee voting members are not concerned about the October’s sell-off, stating that just a long-term turbulence might convince them to change the economic growth outlook. Although the recent plunge of the equities could hurt the investors’ confidence and influence a strong risk aversion together with decreasing the capital expenditure, such a scenario is not forecasted by the FOMC members yet. December’s rate hike, the fourth time this year, is widely anticipated by the market players with the odds rising up to 74%. The regulator would not take in count the bear market in October, despite a meaningful decline of more than 7% for the major benchmarks in the United States. Fundamental data remains sustainable and the economic growth is predicted to stay robust. Financial turmoil might impact the economic growth only in case of its long-term nature.

A yearly growth result has been lost for S&P and DOW indices on Wednesday. Investors kept selling the shares despite the earnings season showed one of the best periods in decades in the scope of corporate profits. The operating profit of S&P 500 listed companies is more than twice higher than the average historical level. However, investors do not care and equities appeared in the middle of nowhere, unexpectedly for several market analysts. The present confidence turns into the future panic instantly, especially in the light of instability signs in the real estate segment, the Chinese economic vulnerability and accelerating inflation. All those factors eliminated the optimism which helped S&P 500 to surge for 10% in September. The volatility index has peaked since February. The latest market crash is not similar to the previous technical retracements and the investors’ main concern of the Federal Reserve further tightening is still on the table. So, the bulls would struggle to pare the losses quickly.

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