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British diplomats keep calm and continue in EU

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John-Paul Smith won’t abandon his bearish bet against third world countries.?

The?founder of research firm Ecstrat, renowned for his early warning of Russia’s equity-market plunge in 1998 while at Morgan Stanley, is finding lots of places to direct his pessimism. Among his latest concerns: authoritarian regimes in China and Russia together with governments in Thailand, Turkey as well as the Philippines shifting in that direction.?

Smith’s caution runs counter to the past, in which the world’s autocratic nations have rewarded bond traders with?larger returns?than democratic countries. While that could possibly be true in early stages of an regime, he said an authoritarian rule eventually hurts productivity when using the valuation on debt and equity assets choosing a hit.?

“I’m can not identify any attractive bets for emerging markets under authoritarian regimes,” Smith said within a interview from London.?”The notion that both sovereign and corporate governance around the globe will gradually converge towards some supposed liberal norm currently is well and truly dead.”

Stocks specifically are adversely affected under authoritarianism because states typically redistribute resources from minority capital to suit their social and political agenda, in line with Smith.?He said this will crush the?decade-long bets some settlement is making on emerging markets. While Smith is bearish across developing-nation stocks, his equity strategy consultancy is less pessimistic on Thailand plus the Philippines near-term given their lower contact with commodity prices, contagion risks with China and moral hazards.

COUNTRY SMITH’S DIAGNOSIS EQUITY RETURN YTD
China We expect the gap between Beijing’s policy rhetoric along with the actual implementation of reforms for being even wider. The essential question is exactly the same: ways to build relationships a regime which adheres to a different set of rules? 16.40%
Russia Russia has moved clear of market-driven reforms toward authoritarian governance with greater state treating the company sector. 3.70%
South Africa There’s a Manichean struggle with the soul on the ANC with all the integrity on the nation’s most significant institutions under attack. 18.20%
Poland The government has weakened constitutional safeguards and sparked a confrontation using the EU. 50.20%
Hungary The shift under Viktor Orban has had the sort of de facto expropriation of foreign direct and portfolio investment. 37.30%
Thailand Thailand’s military-led junta threatens being an all-out authoritarian regime. 22.10%
Turkey Erdogan has borrowed?within the Putin playbook, establishing a “managed democracy” and redistributing property to his supporters. 42.50%
Philippines Rodrigo Duterte’s make use of extra-judicial methods in his war on drugs also underscores a nation shifting towards autocracy. 20.20%

? 2017 Bloomberg

Markets

Macron and Rutte form liberal dream team

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European shares fell to the near four-week low on Wednesday, with a mixed batch of company results sparking profit-taking on a daily basis until the European Central Bank decides monetary policy.

Pharma heavyweight GlaxoSmithKline (GSK) would have been a big faller as comments on possible consumer health acquisitions sparked concerns over its dividend, offsetting strong results.

“Investors remain focused on the protection of the dividend,” said Leerink analyst Seamus Fernandez.

GSK shares fell 5.5%, making the healthcare index the second-biggest sectoral loser and helping drag the pan-European STOXX 600 benchmark down 0.6% to 387.13, its lowest close since late September.

The market fall came despite continued strength in economic data, among the key drivers to do this year’s stocks rally as well as solid corporate earnings growth.

Some fund managers expect trading stocks to fix favorite global macroeconomic backdrop is positive.

On Wednesday market research showed German business confidence surprisingly rose to your record loaded with October, while Britain’s economy obtained speed unexpectedly inside the third quarter.

“A correction is liable, though not a difference of trend,” Andrea Cuturi, chief investment officer at Anthilia Capital in Milan, said.

“Fundamentals are nevertheless supportive,” Cuturi said. “However we predict that next two months the prospect of a correction will be high. We’re entering an amount of 12 months when investors usually protect their gains countless you will find potential catalysts to trigger profit-taking.”

His firm cut experience with euro zone stocks to neutral this month, amid caution over changes in the Fed and decisions over the desolate man the ECB’s bond buying programme, in addition to the slowing pace of earnings growth.

Good quarter?

On Wednesday, earning updates were mixed.

Among luxury companies, Kering rallied 8.8% after yet another forecast-beating quarter from your Gucci brand, boosting luxury peer LVMH, up 1.3%.

“An excellent quarter for any industry, however very polarized, with Gucci clearly leading the momentum at five times the sector growth,” said JP Morgan analysts in the note.

“Gucci is still ‘it’ brand,” wrote Citi analysts.

Biotech firm Novozymes rose 3% after it raised its full-year outlook and reported sales and earnings that beat forecasts.

Ballpoint pens and razor maker BIC however sank 8.3%, hitting a four-year low after nine-month sales came in under consensus. The shares had suffered sharp losses from cut to sales expectations in late September.

Industrial stocks Wartsila and Alfa Laval fell 4.8% and 0.6% respectively after both missed earnings expectations, with Alfa Laval reporting lower order bookings and Wartsila pointing to your challenging marine market.

Overall results are already somewhat underwhelming at this point, with Thomson Reuters data showing fewer companies beating analyst estimates versus the typical quarter.

Overall earnings with the STOXX 600 are set to grow 3.4% this quarter in comparison to the same period in 2016, Thomson Reuters data showed. That growth disappears when energy stocks are stripped out.

“Currently, earnings have delivered a modest beat, but sales have noticed one small miss,” Morgan Stanley analysts led by Matthew Garman wrote inside a note. “Price reply to results has become weak either way beats and misses.”

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Wall Street slips with the open on tepid earnings

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Wall Street slipped along at the open on Wednesday because the US corporate earnings season hit its peak, which includes a number of companies reporting lackluster results.

The Dow Jones Industrial Average fell 4.96 points, or 0.02%, to 23 436.8. The S&P 500 lost 2.79 points, or 0.10%, to two 566.34. The Nasdaq Composite dropped 10.62 points, or 0.16%, in order to six 587.81.

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You ought to avoid the rand

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The emerging-market currencies that posted the very best carry-trade returns in 2010 aren’t necessarily the ideal bets with the final 60 days of 2017.

That’s for the reason that rally that boosted the euro — and took Eastern European counterparts just like the Czech koruna and Poland’s zloty along for any ride — is forecast to fizzle out. For the rest of the year, investors who borrow in dollars and buy developing nations may wish to target countries where steep mortgage rates will drive returns, for example Brazil, Mexico and Indonesia, even if their currencies are unlikely to achieve significantly.

The trade idea — championed by strategists including Marcin Lipka, a senior analyst at Cinkciarz Pl in Poland — draws on the concept political concerns while in the euro area, for instance Catalonia’s separatist move and the upcoming general election in Italy, will more than likely mute gains while in the common currency resistant to the dollar. If you are, the thinking goes, investors would do far better to a target countries where benchmark interest rates will be as similar to what 5x higher as what’s present in Eastern Europe.

“The euro may access a prolonged correction period on more political concerns,” said Lipka, who will be one of the most accurate forecasters to your Turkish lira along with the Romanian leu, in line with Bloomberg rankings. He said it’s likely Eastern European currencies will post a damaging carry return in 2018 because dollar gains strength.

The euro can finish 2017 little changed from now, at $1.18, in accordance with the median estimate of economists surveyed by Bloomberg. For 2018, they predict a 3.4% gain, smaller sized versus the 10% advance seen thus far in 2017.

Buying the zloty or koruna with borrowed dollars has returned more than 16% in 2017, the best among 42 currencies tracked by Bloomberg. Still, benchmark home interest rates in those countries aren’t over 1.5%, weighed against 8.25% in Brazil and 7% in Mexico.

Guillaume Tresca, a senior emerging-markets strategist at Credit Agricole in Paris, says the momentum for developing nations should remain positive and recommends buying high-yielding currencies such as Brazilian real, Mexican peso, Russian ruble, Indonesian rupiah and Indian rupee for carry and spot gains covering the next a few months. According to him it’s best to avoid South Africa’s rand and Turkey’s lira.

“I would turn increasingly more selective,” he was quoted saying.

? 2017 Bloomberg

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