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Week in review: Back to the playground

This week we watched the sterling and FTSE 100 Index move at opposite ends of the seesaw, while the U.S. presidential candidates struggled to play nicely in the sandbox.

Financial markets have been described as casinos, rollercoasters and merry-go-rounds. Recently, though, they’ve been more of a seesaw. The playground favorite was much in evidence this week. As the pound peaked on Wednesday, the FTSE 100 Index cratered. Then they swapped direction, with the FTSE rising as sterling fell back.

The reasons for this seesaw behavior are well rehearsed: a weaker pound benefits many of the biggest UK-listed companies, because they derive so much of their income from abroad. The FTSE managed to recover to a 0.2% gain at Thursday’s close, while the pound slumped back from its midweek high. There could be much more of this to come. Credit Suisse suggested this week that the pound might fall another 5% or 6% against the dollar. Good news for FTSE investors, perhaps, but not so good for consumers.

Four-fingered fears

That’s because it’s consumers who bear the brunt of a weaker pound. Consumer prices are already on the march. UK inflation was 1% for the 12 months ending September 30, marking a two-year high. But the rise probably doesn’t yet show the impact of the weaker pound. Initial signs of the price hikes to come manifested themselves in last week’s short-lived Marmite crisis – the spat between Tesco and Unilever. After restoring the spread to his shelves, Tesco CEO Matt Davies said this week that rising food prices could be “lethal” for low-income consumers.

Even that candy bar favorite the KitKat could be affected. Paul Bulcke, the CEO of Nestlé, said on Thursday that his company’s UK branch would consider “all possible actions” to deal with sterling weakness. But he did seek to reassure anxious consumers that the KitKat would remain a “very enjoyable great break.” And despite the prospect of higher prices, UK shoppers are in good spirits. Surveys released during the week pointed to a considerable rebound in consumer confidence, with Deloitte reporting that confidence was at a five-year high in September.

Hard or soft?

We’ve come to expect plenty of playground behavior from politicians, and there was considerable seesawing this week over the nature of Brexit. Will it be hard or soft? Hard was in the ascendancy at the start of the week, but Philip Hammond, the Chancellor of the Exchequer, said on Wednesday that the City was a “high priority.” He argued that the possibility of a special deal to preserve the UK’s passporting rights for financial services was still very much alive. That gave hope to those who prefer their Brexit on the softer side – and the shares of banks rose in response. The FTSE’s strongest constituents over the week were RBS, Barclays, Standard Chartered and Lloyds.

In continental Europe, markets delivered solid returns. Despite some disappointment when the European Central Bank refrained from extending its stimulus program, the FTSE Europe ex UK Index was up 1.2% for the week to Thursday’s close.

Rough and tumble

Playground behavior continued to characterize the White House race too. “You’re the puppet!” said Donald Trump during the third presidential debate, after Hillary Clinton suggested that President Putin might be pulling Trump’s strings. And they were at it again the next night at the Al Smith Gala dinner. Trump called Clinton “corrupt;” she pointed out that the U.S. was going to have either “the first female president or the first president who started a Twitter war with Cher.”

It was a good week for U.S. shares, with the S&P 500 Index up 0.4% by Thursday’s close. The feisty exchanges of the third debate were seen as going Clinton’s way, and the Mexican peso hit a six-week high against the U.S. dollar as Trump’s chances of victory were seen to recede further.

And finally …

You’d be forgiven for thinking that we have seen quite enough of the U.S. presidential candidates. But Halloween masks based on Trump and Clinton have been selling well, suggesting that the U.S. is set to see a great deal more of them in the week ahead.

In previous elections, sales of presidential candidates’ masks have been a good indicator of who’s most likely to win. But while Clinton holds a formidable lead in most opinion polls, her Republican rival has been winning the costume race. According to suppliers, sales of Trump masks have been outstripping Clinton ones by as much as three to one.

This year might be an outlier, however. After all, Clinton and Trump are considered to be the two least popular contenders on record, suggesting that their suitability for a Halloween horror-show might be unusually high. Be afraid! Be VERY afraid!

Important Information

Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.

Indexes are unmanaged and have been provided for comparison purposes only. No fees or expenses are reflected. You cannot invest directly in an index.

Image credit: UrbanZone / Alamy Stock Photo

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