Fri 22 Sep 2017


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In Portfolioticker today

read_this Hey Jarvis, how did we go today?

Today at the stock market

bull/bearThe S&P 500 closed slightly higher on Friday even though Apple was a drag, as worries about Washington’s latest healthcare legislation proposal eased and investors shrugged off concerns about North Korea. Investors in the broader market were also encouraged by a jump in the Russell 2000 small-cap index, which ended with a record high close.

  • The S&P 500 rose 1.62 points, or 0.06%, to 2,502.22
  • The Dow Jones Industrial Average fell 9.64 points, or 0.04%, to 22,349.59.
  • The Nasdaq Composite rose 4.23 points, or 0.07%, to 6,426.92.
  • Advancing issues outnumbered declining ones on the NYSE by a 1.82-to-1 ratio; on Nasdaq, a 1.91-to-1 ratio favored advancers.
  • About 5.26 billion shares changed hands on U.S. exchanges compared with the 6.03 billion average for the last 20 sessions.

After a volatile day the S&P’s healthcare sector ended 0.1% higher as insurance stocks regained ground after Republican Senator John McCain said he opposed his Republican peers’ latest effort to replace President Barack Obama’s healthcare law.

The S&P technology sector managed to eke out a small gain as investors had more appetite for risk even with a decline of 1% in Apple shares on muted reactions to the iPhone maker’s latest product launch.

“The removal of the healthcare overhang, the fact the North Korea market impact is dwindling and the move in the Russell 2000 has all the smart investors thinking that the grind higher continues,” said Michael Antonelli, managing director, institutional sales trading at Robert W. Baird in Milwaukee.

Some investors moved to safe-haven assets such as gold, after North Korea said it might test a hydrogen bomb over the Pacific Ocean in response to U.S. President Donald Trump’s threat to destroy the reclusive country.

But others felt that the market would cope with the ongoing stand-off between the countries, which has been ratcheting up in recent months. “If you cry wolf enough it loses its impact in the end,” Antonelli said.

Five of the 11 major S&P sectors ended the day lower and utilities led the decliners with a 0.7% loss. After falling as much as 0.5%, the healthcare sector ended 0.08% higher.

Earlier in the day concern about the Graham-Cassidy healthcare bill had wreaked havoc with insurers’ stocks. UnitedHealth closed down 1.1% after falling as much as 3.6% earlier in the day.

The small telecom services index, with only four stocks, was the biggest percentage gainer with a 1.4% rise on consolidation speculation while the energy index rose 0.5% as oil futures settled higher.

T-Mobile gained 1% after Reuters reported that the cellphone network operator was close to agreeing tentative terms on a deal to merge with Sprint, whose shares jumped 6.1%.

The report also pushed up bigger rivals Verizon Communications and AT&T Inc, which could benefit from having one less competitor.Reuters

Market indices

Market indices
^ Market indices today (mouseover for 12 month view) Chart: Google Finance

Index Ticker Today Change 31 Dec 16 YTD
S&P 500 SPX (INX) 2,502.22 +0.06% 2,238.83 +11.76%
DJIA INDU 22,349.59 -0.04% 19,762.60 +13.09%
NASDAQ IXIC 6,426.92 +0.06% 5,383.12 +19.39%

Portfolio Indices

USD and AUD denominated indices over the past 52 weeks (Chart: Bunting)
^ USD and AUD denominated indices over the past 52 weeks Chart: Bunting

Index values

Index Currency Today Change 31 Dec 16 YTD
USD-denominated Index USD 2.739 -0.80% 2.105 +30.13%
Valuation Rate USD/AUD 0.80135 +0.45% 0.72663 +10.28%
AUD-denominated Index AUD 3.421 -1.24% 2.895 +18.18%

Portfolio stock prices

:-) PayPal closed on a record high of 65.08, beating its 20 Sep 2017 record of $64.74.

Stock Ticker Today Change 31 Dec 16 YTD
Alphabet A GOOGL $943.26 -0.45% $792.45 +19.03%
Alphabet C GOOG $928.53 -0.42% $771.82 +20.3%
Apple AAPL $151.89 -0.98% $115.82 +31.14%
Amazon AMZN $955.10 -0.99% $749.87 +27.36%
Ebay EBAY $38.29 +0.10% $29.69 +28.96%
Facebook FB $170.54 -0.33% $115.05 +48.23%
PayPal PYPL $65.08 +0.70% $39.47 +64.88%
Twitter TWTR $17.61 +0.17% $16.30 +8.03%
Visa V $105.56 +0.24% $78.02 +35.29%
VMware VMW $109.15 +0.07% $78.73 +38.63%

FX: USD/AUD

USD

DXY movements
^ Bloomberg Dollar Spot Index (DXY) movements today (mouseover for 12 month view) Chart: Bloomberg

The USD fell after North Korea’s leader promised retaliation. The Bloomberg Dollar Spot Index (DXY) fell 0.2%, the biggest drop in a week.
The EUR gained on strong economic data before Germany votes Sunday. It rose less than 0.1% to USD 1.1944.
Britain’s GBP weakened following U.K. Prime Minister Theresa May’s speech on Brexit. The GBP fell 0.4% to USD 1.3524.
The Japanese yen advanced 0.4% to 112.09 per USD, the first gain in more than a week.
Bloomberg

AUD

AUD movements
^ AUD movements against the USD today (mouseover for 12 month view) Chart: xe.com

Oil and Gas Futures

Futures prices

Crude maintained its rally above $50/barrel as OPEC members gathered in Vienna. West Texas Intermediate crude rose 0.2% to $50.63/barrel.Bloomberg

Prices are as at 15:49 EDT

  • NYMEX West Texas Intermediate (WTI): $50.63/barrel +0.16% Chart
  • ICE (London) Brent North Sea Crude: $56.79/barrel +0.64% Chart
  • NYMEX Natural gas futures: $2.95/MMBTU +0.17% Chart

Apple: Wall Street Concerns About Latest Products

Press/Investor Comments: Bloomberg

Reviews so far are lackluster for Apple Inc.’s new gadgets. This isn’t the first time Apple has received less-than-stellar feedback, but reviewers seem to be particularly disappointed this time around. Each product was docked for specific functional flaws, ranging from the iPhone 8’s middling design to Apple Watch Series 3 issues with wireless connectivity, and quality problems with the Apple TV 4K’s video output. Apple shares fell 0.6 percent to $152.45 at 8:37 a.m.

However, Wall Street seems to be holding out hope that the company will meet the price targets it has set for the stock over the next 12 months, which are as high as $208 a share, a 36 percent upside from yesterday’s close. Most of them are citing either customer loyalty or the higher asking price as reasons that Apple will still hit targets, such as sales and revenue, in coming quarters.

Comments

  • Loup Ventures Management LLC, Gene Munster: ‘Survey suggests better-than-expected demand for iPhone X and iPhone 8, but lines will be shorter tomorrow. This week we surveyed 388 consumers in the U.S. across all demographics and found that of those planning to buy an iPhone in the next year, 25% plan on purchasing an iPhone X and 39% and iPhone 8 and 8 Plus. We are modeling for iPhone X to be 20% of units over the next year, and iPhone 8 and 8 Plus to be 25% of units over the next year. Said another way, the survey suggested 64% of iPhones in the next year will be either the iPhone X, iPhone 8, or 8 Plus, compared to our current model of 45%. While we are encouraged by this survey, we are keeping our iPhone mix estimates unchanged to err on the side of conservatism.’
  • Citigroup Inc., Jim Suva: ‘Overall Conclusion: Customers are likely waiting for iPhone X. We note the much anticipated iPhone X is not expected to be available until 3 Nov 2017 with pre-orders a week prior so we are not surprised that current ship times are quicker and lines shorter than prior launches, as we believe users will wait to compare to iPhone X before making a final purchase.’
  • PiperJaffray Co., Michael Olson: ‘Any weakness for early Sales of iPhone 8 could be a case of ’short-term pain for long-term gain’. We moved 500,000 iPhone units from Sep 2017 into Dec 2017 and Mar 2018 as potential buyers may wait for iPhone X. It’s noteworthy that a mix shift towards iPhone X, even to the detriment of near-term iPhone 8 units, is positive for Apple.’
  • Morgan Stanley, Katy Huberty: ‘The key takeaway from Apple’s recent product launch is average selling price uplift across the product line. An aspirational brand, high customer loyalty, and weaker USD allow Apple to increase prices without hurting demand, pushing fiscal year 2018 earnings per share 7% higher to $12.60 and price target to $194, from $182.Bloomberg 22 Sep 2017

Facebook: Zuckerberg Plans To Sell Up To 18pct of His Facebook Shares

SEC Filing

Item 3.03 Material Modification to Rights of Securities Holders.

On September 21, 2017, the Board of Directors (the “Board”) of Facebook, Inc. (the “Company”), following the unanimous recommendation of the Board’s Special Committee of independent directors, determined not to proceed with the filing of the amended and restated certificate of incorporation, as described in the Company’s definitive proxy statement dated June 2, 2016 (the “Proxy Statement”), and agreed to abandon the reclassification of the Company’s common stock as more fully described in Proposal Seven of the Proxy Statement and approved at the Company’s Annual Meeting of Stockholders on June 20, 2016. As a result, the Company will not proceed with the dividend of Class C capital stock or enter into a founder’s agreement with Mark Zuckerberg as described in such proposal.

Item 8.01 Other Events.

On September 22, 2017, Mr. Zuckerberg announced that he anticipates selling 35 million to 75 million shares of Facebook stock over approximately 18 months from the date of this report in order to fund the philanthropic initiatives of Mr. Zuckerberg and his wife, Priscilla Chan, in education, science and advocacy. Any sale of shares beneficially owned by Mr. Zuckerberg will be disclosed publicly in accordance with the rules established by the U.S. Securities and Exchange Commission under Section 16 of the Securities Exchange Act of 1934.

US Securities and Exchange Commission, “Form 8-K, Facebook Inc“, 22 Sep 2017 Filed Document

flag_europe EU: Eurozone PMI. Sep 2017 (Flash)

Press Release Extract [ser_eu_pmi]

Key findings:

  • Flash Eurozone PMI Composite Output Index at 56.7 (55.7 in August). 4-month high.
  • Flash Eurozone Services PMI Activity Index at 55.6 (54.7 in August). 4-month high.
  • Flash Eurozone Manufacturing PMI Output Index at 59.5 (58.3 in August). 77-month high.
  • Flash Eurozone Manufacturing PMI at 58.2 (57.4 in August). 79-month high.

eu_pmi_20170922

The eurozone economy ended the third quarter on a strong note, with growth of business activity picking up to its highest since May to register one of the strongest gains seen over the past six years.

The headline IHS Markit Eurozone PMI rose to 56.7 in September, according to the preliminary ‘flash’ estimate (based on approximately 85% of final replies), up from 55.7 in August.

Inflows of new orders showed the largest monthly increase since April 2011, representing a renewed surge in demand after the pace of new order growth had slowed in the prior two months.

Growth accelerated in both manufacturing and services, albeit with the former continuing to lead the expansion. While service sector activity showed the largest rise since May, the increase in manufacturing output was the greatest since April 2011. The outperformance of manufacturing relative to services also increased to the widest since January 2014.

The goods-producing sector was again buoyed by rising exports, the rate of growth of which dipped slightly – linked to the recent appreciation of the euro – though remained slightly above the average seen so far this year.

The survey also brought further signs of capacity being stretched.

Backlogs of work rose to the greatest extent since February 2011 as companies struggled to cater for the higher inflows of new work.

Suppliers’ delivery times meanwhile signalled the highest incidence of manufacturing supply chain delays for almost six-and-a-half years.

The need to boost capacity resulted in the second- largest increase in employment recorded by the survey over the past decade, falling just shy of March’s post-crisis peak.

Manufacturing’s superior performance was reflected by a record rise in employment. Whereas service sector jobs growth improved to close in on recent highs seen earlier the year, a far more marked rate of net job creation was seen in manufacturing, outpacing the prior 20-year record seen back in May.

Increased demand for staff also reflected improved optimism about the future, which perked up from an eight-month low in August to reach the highest since June. Confidence rose to three-month highs in both manufacturing and services.

Prices

The faster pace of business activity growth and upturn in demand in September was accompanied by rising price pressures. Input cost and selling price inflation gathered pace for a second successive month, with both reaching the highest rates since April.

Prices charged for services rose to the greatest extent since May, while the increase in factory gate prices was the joint-highest since June 2011.

Country details

Looking at the data by country, rates of expansion accelerated to the highest seen for over six years in both France and Germany, with both also registering further improvements on the already- impressive employment gains seen in prior months.
Elsewhere, growth of business activity waned to a six-month low, though remained only just shy of the average seen in the year to date. Jobs growth accelerated slightly amid improved optimism about the outlook.

Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at IHS Markit said:

“The eurozone economy ended the summer with a burst of activity, with the PMI signalling renewed impetus to already-impressive rates of growth of output, order books and employment during September.

“The survey data point to 0.7% GDP growth for the third quarter, with accelerating momentum boding well for a buoyant end to the year.

“The stronger euro was cited as a concern among manufacturers, but as yet appears to have had only a modest impact on exports. Manufacturing in fact remains a major driver of the current upturn, with export sales playing an important role in pushing order books higher and encouraging further investment in capacity expansion.

“Across both manufacturing and services, job creation was the second-highest seen over the past decade, with manufacturing job gains smashing through prior survey records to register the largest monthly rise in factory headcounts for over two decades.

“Despite the increase in payroll numbers, capacity continues to be stretched, often meaning customers have had to pay higher prices to ensure supply of both goods and services.

“The rise in business activity and accompanying build-up of price pressures will fuel expectations that the ECB is poised to announce its intention to rein back some of its stimulus, reducing its asset purchases in 2018.”

IHS Markit, “IHS Markit Flash Eurozone PMI®“, 22 Sep 2017 More

flag_usa US: PMI. Sep 2017 (Flash)

Press Release Extract [ser_us_pmi]

Key Findings

  • Flash U.S. Composite Output Index at 54.6 (55.3 in August). 2-month low.
  • Flash U.S. Services Business Activity Index at 55.1 (56.0 in August). 2-month low.
  • Flash U.S. Manufacturing PMI at 53.0 (52.8 in August). 2-month high.
  • Flash U.S. Manufacturing Output Index at 52.4 (52.4 in August). Unchanged.

us_pmi_20170922

September data revealed a strong increase in U.S. private sector business activity, with the rate of growth close to August’s seven-month peak.

The latest expansion of private sector output was driven by a robust upturn in services activity, which contrasted with relatively subdued growth among manufacturing companies.

At 54.6 in September, the seasonally adjusted IHS Markit Flash U.S. Composite PMI Output Index was down slightly from 55.3 in August but still comfortably above the 50.0 no-change value. Higher levels of private sector output have been recorded in each month since March 2016.

Robust business activity growth was supported by a further rise in new work received by private sector firms in September. However, the latest increase in new orders was the slowest for three months.

Weaker new business growth contributed to the softest pace of job creation since June. The moderation in employment growth was driven by the service sector, as manufacturing payroll numbers expanded at the quickest rate since December 2016.

Meanwhile, private sector cost inflation edged up to its strongest since June 2015. Increased cost pressures reflected the steepest rise in manufacturing input prices for almost five years.

The composite index is based on original survey data from the IHS Markit U.S. Services PMI and the IHS Markit U.S. Manufacturing PMI.

IHS Markit U.S. Services PMI™

Service providers indicated a strong expansion of business activity during September. A 55.1, the seasonally adjusted IHS Markit Flash U.S. Services PMITM Business Activity Index1 was down only slightly from August’s 21-month peak. The average reading for the third quarter as a whole (55.2) was the highest since Q3 2015.

Survey respondents noted that the resilient economic backdrop had contributed to rising consumer and business spending. A further robust rise in new work led to solid employment growth and another increase in backlogs of work across the service sector in September.

Despite recording a sustained expansion of client demand, service providers are the least optimistic about the business outlook since September 2016. Some firms cited renewed concerns about their prospects for sales growth over the year ahead.

September data pointed to a slowdown in input price inflation from August’s 26-month peak. However, average prices charged by service sector firms increased at one of the fastest rates seen over the past three years.

IHS Markit U.S. Manufacturing PMI™

Manufacturing business conditions continued to improve at a relatively subdued pace in September. At 53.0, up fractionally from 52.8 in August, the seasonally adjusted IHS Markit Flash U.S. Manufacturing Purchasing Managers’ IndexTM (PMITM)2 remained weaker than its post-crisis trend (53.9).

September data indicated that output volumes increased at a moderate pace that was unchanged from August’s 14-month low. Some manufacturers noted that Hurricane Harvey had led to temporary disruptions to production at their plants.

However, there were also signs of underlying fragility in September, with new orders expanding at one of the slowest rates seen over the past year. Latest data also indicated that new export sales remain close to stagnation.

Backlogs of work increased for the second month running in September, which encouraged some firms to boost their payroll numbers. The rate of employment growth was the fastest so far in 2017.

Input price inflation was the steepest since December 2012. A number of manufacturers linked rising raw material prices to higher transportation costs and supply disruptions from Hurricane Harvey.

Latest data revealed intense pressure on supply chains, with vendor delivery times lengthening to the greatest extent since February 2015.

Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at IHS Markit said:

“The US economy showed encouraging resilience in a month of hurricane disruption. Although the September surveys indicated a moderation in growth of business activity, the overall rate of expansion remained robust. Historical comparisons of the PMI with GDP indicate that the surveys point to the economy growing at an annualised rate of just over 2% in the third quarter.

“Similarly, the overall rate of job creation remained solid, historically consistent with non-farm payrolls rising by 180,000 in September.

“The biggest impact of Hurricane Harvey was evident in manufacturing supply chains, where resultant supply shortages were a key driver of higher prices. Supply delays were the most widespread in two and a half years, while input price inflation rose to the highest since 2012.

“The manufacturing sector, which was already struggling in August, consequently acted as an increasing drag on the economy, leaving services as the main growth driver. The survey is consistent with a slight deterioration in comparable official manufacturing output data.

“While repair work in the aftermath of Hurricane Harvey may boost short-term business activity in coming months, a drop in business optimism about the year ahead suggests that companies have become less confident in the longer-term outlook.”

IHS Markit, “IHS Markit Flash U.S. PMI™“, 22 Sep 2017 (09:45) More

flag_uk UK: Credit Rating Downgraded by Moody’s

Moody’s Investors Service, (“Moody’s”) has today downgraded the United Kingdom’s long-term issuer rating to Aa2 from Aa1 and changed the outlook to stable from negative. The UK’s senior unsecured bond rating was also downgraded to Aa2 from Aa1.

The key drivers for the decision to downgrade the UK’s ratings to Aa2 are as follows:

1. The outlook for the UK’s public finances has weakened significantly since the negative outlook on the Aa1 rating was assigned, with the government’s fiscal consolidation plans increasingly in question and the debt burden expected to continue to rise;

2. Fiscal pressures will be exacerbated by the erosion of the UK’s medium-term economic strength that is likely to result from the manner of its departure from the European Union (EU), and by the increasingly apparent challenges to policy-making given the complexity of Brexit negotiations and associated domestic political dynamics.

Concurrently, Moody’s has also downgraded to Aa2 the Bank of England’s issuer and senior unsecured bond ratings from Aa1. The rating on its senior unsecured medium-term note (MTN) program was downgraded to (P)Aa2 from (P)Aa1. The short-term issuer ratings were affirmed at Prime-1. The ratings outlook was also changed to stable from negative.

The foreign and local currency bond ceilings and the local-currency deposit ceiling remain unchanged at Aaa/P-1. The foreign-currency long-term deposit ceiling was lowered to Aa2 from Aaa, and the short-term deposit ceilings remain P-1.

RATIONALE FOR THE DOWNGRADE TO Aa2

First Driver: Weakening Public Finances With Higher Budget Deficits in the Coming Years Amid Pressure to Raise Spending

Moody’s expects weaker public finances going forward, partly linked to the economic slowdown under way but also reflecting the increasing political and social pressures to raise spending after seven years of spending cuts. Since 2015, the government has been finding it increasingly difficult to implement the spending cuts that it has been targeting, in particular on welfare spending. More recently, the government has yielded to pressure and raised spending in several areas, including for health and adult social care. It also agreed to above-budget pay increases for some public sector workers. While these additional expenditures will be funded out of current budgets, the pressure to continue to increase spending in the coming years is likely to remain high, in particular on health care and the public sector wage bill.

In addition, in order to secure a working parliamentary majority, the new government agreed a ‘confidence and supply’ arrangement that increases public spending by GBP1 billion for Northern Ireland. It also abandoned a pre-election promise to review the costly so-called “triple lock” on state pensions after 2020. Overall, Moody’s expects spending to be significantly higher than under the government’s current budgetary plans and higher than the rating agency expected when the negative outlook was assigned in June 2016.

At the same time, revenues are unlikely to compensate for higher spending. Earlier this year, the government abandoned a planned increase in national insurance contributions for the self-employed. Instead, the government has become reliant on highly uncertain revenue gains from tackling tax avoidance to fund tax cuts, as the Office for Budget Responsibility recently pointed out. Hence, while last year’s general government budget deficit turned out somewhat lower than expected (3.0% of GDP on a calendar year basis), Moody’s expects the (general government) budget deficit to remain at levels of 3-3.5% of GDP in the coming years, against the government’s plan of a gradual reduction to below 1% of GDP by 2021/22.

The UK’s broader fiscal framework — previously one of the strengths of the sovereign’s credit profile — has also weakened in recent years as illustrated by repeated revisions to medium-term fiscal targets and delays in reversing the rising debt trend. In contrast to the government’s earlier plans to have public sector net borrowing in surplus by 2019-20, the current objective is for the structural deficit to be below 2% by 2020-21; and the supplementary objective of having net debt as a percentage of GDP decline every year has been delayed to 2020-21 (from 2015-16 before). While these targets may be more realistic, the changes signal weaker predictability.

Weaker public finances will imply a further delay in reversing the rising public debt ratio. This places the UK among the few highly-rated European sovereigns where the public debt ratio continues to rise. Moody’s expects the ratio to increase to close to 90% of GDP this year and to reach its peak at close to 93% of GDP only in 2019, two years later than the latest government plans. Moreover, while the UK government benefits from one of the longest average maturities of its debt stock among advanced economies, the cost of the debt is comparatively high with Moody’s preferred metric — interest payments as a share of government revenues — at 6.3% compared to a ratio of around 3.6% for most other Aa2-rated peers.

Second Driver: Erosion of Economic Strength as a Result of EU Exit Decision and Increasing Challenges to PolicymakingS

Moody’s believes that the UK government’s decision to leave the EU Single Market and customs union as of 29 March 2019 will be negative for the country’s medium-term economic growth prospects. Aside from the direct impact on the UK’s credit profile, the loss of economic strength will further exacerbate pressures on fiscal consolidation.

Growth has slowed in recent months, with average quarterly growth of just 0.26% in the first two quarters, versus an average of 0.6% over the 2014-2016 period. Private consumption has slowed sharply and business investment has been weak since 2016, most likely linked to the Brexit-related uncertainty. While future years may see some recovery, Moody’s expects growth of just 1% in 2018 following 1.5% this year and 2.25% on average in recent years.

More importantly for the UK’s credit profile, Moody’s does not expect growth to recover to its historic trend rate over the coming years. The UK is a relatively open economy, and the EU is by far its largest trading partner. Research by the National Institute of Economic and Social Research (NIESR) suggests that leaving the Single Market will result in substantially lower trade in goods and services with the EU. In a similar vein, both the NIESR and the Bank of England estimate that private investment will be materially lower in the coming years than in a non-Brexit scenario.

Moody’s is no longer confident that the UK government will be able to secure a replacement free trade agreement with the EU which substantially mitigates the negative economic impact of Brexit. While the government seeks a “deep and comprehensive free trade agreement” with the EU, even such a best-case scenario would not award the same access to the EU Single Market that the UK currently enjoys. It would likely impose additional costs, raise the regulatory and administrative burden on UK businesses and put at risk the close-knit supply chains that link the UK and the EU. Also, free trade arrangements do not as a standard cover trade in services — which account for close to 40% of the UK’s exports to the EU and 80% of Gross Value Added in the economy — given the prevalence of non-tariff trade restrictions and the need to align regulations and standards. In Moody’s view, the differences of outlook between the UK and the EU suggest that the most likely outcome is now a rather more limited free trade agreement which may exclude services: the UK’s desire to pursue its own regulatory policies and to avoid the jurisdiction of the European Court of Justice will make finding an agreement on services challenging. Moreover, any free trade agreement will likely take years to negotiate, prolonging the current uncertainty for businesses.

Aside from the direct impact on the UK’s credit profile, weakening growth prospects are likely to exacerbate the government’s evident fiscal challenges. And this is likely to be happening during a period in which policymakers will be increasingly distracted by the twin challenges of sustaining a domestic political consensus on how to operationalise Brexit and reaching agreement with EU counterparts.

Brexit carries with it a heavy policy and legislative agenda which will dominate policymaking in the years to come. In addition to ensuring a smooth exit from the EU, the UK authorities aim for significant changes to the UK’s immigration policy, its broader trade policies as well as regulatory policies. With Brexit dominating the government’s legislative priorities for the coming years, there is likely to be limited political capital and civil service capacity to address other challenges relating to the UK’s growth potential and weak productivity growth. While Moody’s continues to assess the UK’s institutional strength to be very high, the challenges for policymakers and officials are substantial and rising. The recent loss of the UK government’s parliamentary majority further obscures the future direction of economic policy.

RATIONALE FOR STABLE OUTLOOK

The fiscal deterioration that Moody’s expects is balanced by the UK’s continued economic and institutional strengths, that compare well to peers at the Aa2 rating level. While the ongoing Brexit negotiations introduce a high level of uncertainty over the economic outlook for the UK, Moody’s base case remains that some form of a free trade agreement is in the interest of both sides and will ultimately be agreed. Such a scenario would mitigate the negative economic implications of the UK’s departure from the EU to some extent.

In that context, Moody’s notes that the UK government may be softening its negotiating stance in a number of areas, including on the European Court of Justice, on continuing budget contributions in the transition phase and most importantly on the need for a transitional agreement beyond March 2019 to limit the disruption to trade following the UK’s exit.

WHAT COULD CHANGE THE RATING UP/DOWN

The combination of eroding fiscal and economic strength which drove today’s action implies limited upside to the rating following the downgrade. Over the longer term, a more rapid and sustained recovery in fiscal strength, together with evidence that the economic impact of Brexit is less material than Moody’s currently estimates would be positive for the rating.

The rating would come under further downward pressure if Moody’s concluded that public finances were likely to weaken further than Moody’s currently expects. It would also be under pressure if Moody’s concluded that the economic impact of the decision to exit the EU would be more severe than Moody’s currently expects, perhaps because the negotiations with the EU failed to secure an effective transition agreement that would allow for an orderly transition to new trade arrangements.

  • GDP per capita (PPP basis, US$): 42,481 (2016 Actual) (also known as Per Capita Income)
  • Real GDP growth (% change): 1.8% (2016 Actual) (also known as GDP Growth)
  • Inflation Rate (CPI, % change Dec/Dec): 1.6% (2016 Actual)
  • Gen. Gov. Financial Balance/GDP: -3% (2016 Actual) (also known as Fiscal Balance)
  • Current Account Balance/GDP: -4.4% (2016 Actual) (also known as External Balance)
  • External debt/GDP: [not available]
  • Level of economic development: Very High level of economic resilience
  • Default history: No default events (on bonds or loans) have been recorded since 1983.

On 19 September 2017, a rating committee was called to discuss the rating of the United Kingdom, Government of. The main points raised during the discussion were: The issuer’s economic fundamentals, including its economic strength, have materially decreased. The issuer’s fiscal or financial strength, including its debt profile, has materially decreased. Other views raised included: The issuer’s institutional strength/framework, have decreased. Susceptibility to political event risk has increased.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

Moody’s Investors Service, “Rating Action: Moody’s downgrades UK’s rating to Aa2, changes outlook to stable“, 22 Sep 2017 More

flag_japan Japan update

Currency: USD/JPY

JPY movements
^ JPY movements against the USD over the past month (mouseover for inverse) Chart: xe.com

Stockmarket: Nikkei 225

N225 movements
^ Nikkei N225 movements over the past week Chart: Google Finance

flag_china China update

Currency: USD/CNY

CNY movements
^ CNY movements against the USD over the past month (mouseover for inverse) Chart: xe.com

Stockmarket: CSI300

CSI300 movements
^ Shanghai CSI300 movements over the past week Chart: Google Finance