Market Commentaries 2017
The Euro fell sharply following the Catalan vote which resulted in the three pro-independence parties claiming a narrow victory, although the centre-right, pro-unionist Citizens party was the single biggest winner. The vote attracted a record turnout of more than 80%, dismissing fears that holding the election on a weekday rather than the usual Sunday would hit turnout. Spanish bonds fell along with peripheral European government debt, while stocks in Europe also struggled for traction with the Stoxx Europe 600 Index falling by 0.1% as of this morning. The result indicates that Spain’s political turmoil is set to continue, which is likely to be a severe blow to the Spanish government which had hoped the vote would end the push for succession. Elsewhere, the FTSE 100 Index continues to break all-time highs, while yields on UK and US 10-year government bonds ease from their recent highs.
The biggest US tax reform for decades has been voted through the Senate by 51 to 48, though must now go back to the House of Representatives today for review due to two provisions failing to meet Senate budget rules. Despite this, the bill is expected to be approved with small amendments. After the Republican's failure to repeal Obama Care earlier in the year, the US tax bill marks the first major legislative reform package to pass through congress since Trump's election victory. The planned $1.5 trillion of tax cuts is aimed at helping US businesses thrive and will see corporate tax cut from a range of 15%-35% down to 21%, as well as lowering the cost to repatriate overseas money and reducing Inheritance tax. US stock markets are poised to open up and head towards fresh record highs.
The Federal Reserve has, for the third time this year, raised the US interest rate by a quarter percentage point to 1.25 -1.5 per cent. Whilst the hike itself had been broadly priced into the market the FED’s indication of another three hikes in 2018 and a further two in 2019 served to put some clarity into the FED communication on the trajectory of short term rates. Markets however took the communication on future hikes as overly dovish which saw the dollar and sovereign bond yields fall in overnight Asian trading.
The annual rate of change to UK inflation has peaked over 3% for the first time since 2012. The 3.1% figure is a full percentage point over the central banks long term inflation target of 2% and prompts Mark Carney, the Bank of England governor, to write a letter to Downing Street explaining why the central bank has missed its inflation target. The rapid rise of UK core inflation continues to be driven by the fall in the pound after the vote to leave the EU last year. Economists believe the 3.1% figure represents the peak of UK interest rates with economists predicting a normalisation from these levels over the next 2 years. Should inflation remain at these levels however, markets will be looking to the BoE for more hawkish rhetoric surrounding another interest rate rise in the UK over 2018.
Sterling has come under pressure this week amidst continuing political uncertainty regarding Brexit, falling for a third day of trading against major currencies. Since Monday, around the time rumours of a deal between Ireland and the UK over details of how to treat the boarder after Brexit were dashed, Sterling has lost around 1% against the US dollar, whilst falling 1.6% against the Japanese Yen. The negative reaction stems from the inability of Theresa May's government to reach agreement with the Democratic Unionist Party (DUP) which would allow the UK to move into the second and crucial phase of Brexit negotiations during which trade agreements will be made. Markets have generally been favouring buying UK government debt over equities in a week where riskier assets, so far, appear less attractive.
Over the weekend US Senate Republicans past a sweeping tax reform package in a 51 – 49 vote. Whilst both Senate and Congressional support for the cuts remains polarised over its impact on the US national deficit, the bill, which represents the largest tax overhaul in the US over the last 30 years, will see tax rates fall to 20% for US corporations and tax cuts to benefit the wealthiest Americans. Markets are expected to bounce back on the news after the selloff seen on Friday after ex national security advisor Michael Flynn plead guilty to lying to investigators over the probe into Russia’s involvement in the 2016 election.
Theresa May has managed to secure the backing of Whitehall to offer a divorce bill to the EU of around €50bn which negotiators on both sides agree will almost certainly break the current impasse on negotiations. Whitehall’s backing of the larger bill is contingent with the UK being able to secure a good trade deal with the EU. Whilst the proposed figure is still tentative the pound has found some strength from the announcement, indicating the market is prepared to get behind the figure and the prospect of moving these delicate negotiations forward.
Chancellor Phillip Hammond has today delivered the Autumn Budget which included a raft of new measures to aid several key issues facing the UK economy. Most notably, the government is committing £44bn towards housing along with various tactics to encourage new development and a target of 300,000 new homes every year by the mid-2020s. Stamp duty will also be abolished for first time buyers to the value of £300,000. Brexit preparations will receive an extra £3bn, whilst the NHS will see spending increase by £2.8bn to ease pressure. Perhaps the most important announcements were the OBS downgrades to UK growth and deficit reduction. UK growth has been downgraded from 2% to 1.5% in 2017, after which it is expected to fall to 1.4% in 2018, and 1.3% in 2019 and 2020, before rising again. Government borrowing is now forecast to be 2.4% of GDP for 2017, reducing to 1.3% by 2020. Despite the slower deficit reduction plans and economic downgrades, markets have been relatively unfazed.
US consumer price inflation rose by 0.1% last month, core CPI which strips out oil and food prices was slightly stronger at 0.2%. Price improvement came from the second hand car market and medical services which both posted positive price gains, overall drug prices remained steady. Last month’s CPI print is enough to tip the year on year inflation rate in the US up to 1.8% from 1.7%. With the depreciation in the dollar coming from 2017 and steady levels of unemployment we can expect to see upward pressure on US headline inflation in 2018 and should this materialise we expect to see the FED raising interest rates faster than the market is currently pricing for.
CPI Inflation figures for the year to October have come in below consensus forecasts of 3.1%, holding flat at 3%. Though this level of inflation remains the highest the UK has seen in 5 years, the month-on-month increase of 0.1% represented a slowing of inflationary pressure from the previous month. The Bank of England's (BoE) recent interest rate hike was a step to address rising inflation since the Brexit vote, though further hikes over the coming years may be expected, as the BoE has signalled, if inflation does not return to the target rate of 2%. In response to the data, Sterling fell against major currencies, down 0.6% against the euro shortly after, adding to weakness seen this week amidst renewed political uncertainty in the UK and frustration over Brexit negotiations. UK government debt was also being bought after the news, whilst the FTSE 100 showed little reaction.
A monthly estimate of UK economic output from the National Institute of Economic and Social Research (NIESR) has shown a slight improvement in growth, with a 0.5% expansion in the three months to October compared with the previous Office for National Statistics reading of 0.4% in the three months to September. The same think-tank is predicting a real GDP growth rate of 0.5% for the last three months of 2017. The central reason for this improvement in growth is being chalked up to increasing international demand thanks to a weaker home currency making UK goods and services more attractive. Following the news, Sterling has strengthened against major currencies, exacerbating the day's decline in the FTSE index. UK government debt has continued to see yields track upwards as markets sell safer assets in favour of taking on more risk.
UK industrial output increased for fourth months in a row in the 12 months to September, beating economic forecasts. A rise of 2.5% was seen which is the greatest year-on-year increase since February. At the same time, Britain's trade deficit with the rest of the world has narrowed for the second month in a row as demand increases for goods exported, closing the gap by £700m to £2.75bn. Construction, on the other hand, has fallen for the second quarter in a row to the end of September, and stood at a 1% increase year-on-year which was below the lowest forecasts. The news is keeping the pound relatively steady, though the FTSE All Share has declined despite the relatively positive economic results. UK bonds are being sold, however, which has pushed the yield on the UK 10-year Gilt to its highest level in over a week as markets seek to take more risk
President Trump has named Jay Powell as the next Federal Reserve chairman. Mr Powell, an existing Federal Reserve governor since 2012 is considered a more dovish candidate with ideals closer to that of Janet Yellen, his predecessor, than the more hawkish John Taylor who was also seen as a potential candidate. This appointment from the President represents a continuation of the status quo at the central bank that should help to preserve both the growth environment seen in the US economy, and the sustained rally from the US stock market. Predictably, US markets did not react to the appointment nor did Asian markets in overnight trading. The dollar seems to be the largest mover as uncertainty around the implementation of US tax reform continues to remain at the forefront of investors’ minds.
The Bank of England (BoE) has today voted seven-to-two in favour of raising the UK’s base rate from 0.25% to 0.5%. This interest rate rise represents the first time the BoE has raised the base rate since 2007. The largest argument the BoE put across for the rate rise was the fact that inflation continues to run at 3%, ahead of their 2% target. It has, however, been termed a ‘dovish hike’, given that the BoE has stated that two hikes in the next three years is sufficient to return inflation back to its 2% target, which reflects a very slow hiking cycle. Many in the market believe that with Brexit volatility remaining high and UK growth continuing to slow, this is not the time to be raising rates which would put greater pressure on the UK’s already fragile GDP growth. The news sent the pound sharply lower, while the internationally dominated FTSE 100 index rose and yields on UK government bonds fell, as concerns about the health of the UK economy increased demand for safer assets.
Eight people have been killed in a New York terror attack that took place yesterday afternoon. Shortly after 15:00 local time, a white pick-up truck rented from retailer Home Depot struck cyclists and pedestrians while being driven along the city's lower west side cycle track killing eight people and injuring eleven more. The truck finally came to a stop after crashing into a school bus, the suspect was shot and arrested as he exited the vehicle.
A combination of strong earnings from US tech companies and better than expected GDP growth have seen US markets rally today, with the US dollar also seeing significant strength against major currencies. US year-on-year GDP came in at 3% up to the end of September, compared with forecasts of around 2.2%. The US dollar index, a measure of the currency against a basket of peers, is currently up 0.45%, helped in part by weakness in Sterling and the Euro today. The NASDAQ, America's tech-heavy stock market, has rallied strongly, currently up around 1.8%, whilst the S&P 500 – the 500 largest traded companies – has gained around 0.6%.
Mario Draghi, president of the European Central Bank, struck a dovish tone at today’s meeting on monetary policy for the single currency block. Draghi announced his intention to begin tapering the European QE project down to monthly purchases of € 30 billon from January next year. Whilst this is a meaningful figure, one must remember that the proceeds from existing bonds will continue to be reinvested back into the bond market. Draghi went on to state that despite the tapering programme, there will be an ample degree of monetary stimulus remaining. Markets took this as an overly dovish statement that sent the euro down 0.8%, as investors pushed back their expectations of an interest rate hike in 2019.
Early estimates from the Office for National Statistics suggest UK GDP improved slightly in Q3 with growth of 0.4%, beating forecasts and bringing year-on-year growth to 1.5%. Economic Growth was lead predominantly by Services and Manufacturing sectors over the summer. Today's GDP release is an improvement on Q2 figures which saw 0.3% growth. However year-on-year growth of 1.5% still lags other G20 countries and historical norms for the UK, underlining the effect of Brexit uncertainty. The pound rallied on the news which caused the FTSE 100 to begin selling off, UK government debt was also being sold down on the expectation that this GDP surprise strengthens the Bank of England's conviction to raise rates at its November meeting.
Markets reacted positively on the news that prime minister Shinzo Abe has won a super majority in the most recent snap elections in Japan. With a two thirds majority for the Liberal Democratic party-led coalition the prime minster begins his historic third term at the helm of the Japanese economy. With this victory Abe now has a much stronger mandate from the country to continue pursuing his economic reform agenda coined Abenomics. The PM also intends to begin implementing new constitutional reforms in Japan, starting with a clause to recognise the legality of Japans armed forces. With the Yen weakening on the news the Nikki 225 rallied a further 1% in overnight trading setting a record of 16 straight days of gains for the index.
From April 2018, the Bank of England (BoE) will be taking over the administration of the Sterling Overnight Index Average (Sonia), the reference rate that was chosen to replace the London Interbank Offer Rate (Libor) earlier this year. Sonia is used to value Sterling-based derivatives and has replaced Libor as the benchmark rate at which banks will be willing to lend to each other. The benchmark is also important to the wider economy as it is used to set the rate of other instruments such as mortgages and corporate debt. Libor came under close scrutiny following scandals involving rate-rigging, and since a marked fall in interbank lending the integrity of the benchmark has been increasingly deemed it unfit for purpose. Shifting to a new benchmark is seen by the BoE as an important and necessary step in improving the stability of the financial system – a key remit of the central bank – though the process will have to be managed very carefully.
US Consumer price inflation for September came in weaker than expected at 0.5% with core inflation rising 0.1%. The headline figure was largely driven by a surge in gasoline prices during the hurricane period. US government debt rallied off the news with yields coming down on the longer dated debt maturities. The FED have, however, intimated over the year that the slow rise in inflation is more down to temporary factors over anything more systemic within the economy and the same is true with the September print. This central bank sentiment along with robust US growth numbers have seen investors continuing to price in a large probability that the FED will raise interest rates in December.
US stock markets have opened lower after data on job creation showed 33,000 fewer employees on payroll for the month of September – the first loss since 2010. This comes after recent hurricanes caused severe disruption to parts of the country which is thought to have hurt smaller retailers and businesses in particular, but follows an average of 91,000 jobs being created in the three previous months. Offsetting the news that job creation had contracted, other figures also showed an uptick in wage growth, up year-on-year from 2.7% to 2.9% and well past expectations of 2.5%. The rise in wage growth has now increased market confidence that the Federal Reserve will press ahead with a rate hike at its next meeting, with over 90% of those surveyed now expecting a hike. The US dollar initially spiked on the jobs data, though has since fallen flat again, while US government debt remains under pressure, with yields up on the day.
Following an ill-received party conference speech by Teresa May on Tuesday, pressure is mounting for the Conservative party to initiate a leadership contest, casting doubt on the stability of the UK political situation and the implications this has for already slowly progressing Brexit negotiations. Today, Conservative party members have been calling publicly for the leadership contest and it is looking increasingly likely that the Prime Minister's position has become untenable, though key figures such as Michael Gove have been speaking to defend her role as party leader. The political disquiet has hit the pound, which has, since yesterday, had the worst week of declines against major currencies in over a year, with Sterling falling 2.47% against the US dollar this week. Affecting the pound also is the attention being turned to the Bank of England's looming rate hike decision, the certainty of which is now being questioned after a string of disappointing economic data this week.
Construction activity in the UK has fallen for the first time in 13 months as companies in the commercial building sector shy away from taking risk. The 'Purchasing Managers' index showed the sector be in contraction in September, which comes shortly after Monday saw a similar survey for UK manufacturing return weaker than expected sentiment. Though still in expansion, the manufacturing sector has lost momentum since the Brexit vote, leading to fears that a material slowdown in the UK economy is crystallising. Following these releases, new data today has also shown that consumers are facing the largest fall in real disposable incomes since 2011, a measure of income available to households after tax and adjusted for prices changes. Following these releases, Sterling has fallen moderately against major currencies both yesterday and today, though otherwise equities and bonds seem relatively unfazed.
2.26 million Catalonians voted on Sunday to break away from the Spanish state despite the Spanish government trying to block the unofficial vote. This represents 90% of the turnout, which was estimated to be around 40% of eligible voters. Amidst scenes of violence in places, Spanish authorities failed to stop the vast majority of voters from reaching the ballot box, though in some instances ballot boxes themselves were seized. Prime Minister, Mariano Rajoy, made a statement condemning the vote and that it did not constitute a 'self-determination referendum', yet Catalonia's President, Carles Puigdemont, has indicated he will now press ahead with the result in Parliament. Fallout from the crisis has been largely limited to Spain's stock market, which is down almost 1.5% as measured by the largest 35 companies. FX markets saw the Euro fall 0.6% against the US dollar and 0.4% against the Japanese Yen. Spanish government debt is also under pressure and being sold, lifting yields by over 5%
President Trump yesterday announced proposals for the highly anticipated US Tax reform and hailed an end to the taxation of non-US earnings. Trump proposed cutting the official corporate tax rate from 35% to 20%, whilst this fell short of the 20% cut promised in the election campaign markets and CEO’s in the US have taken the news positively. Treasuries in the US sold off on the news against a stronger dollar and small cap equity market which represents the US sector set to benefit most from a cut to the corporate rate. The proposed new 20% level ensures US corporates cease being the most heavily taxed market and instead pay a competitive tax rate just above that of the UK which is being hailed as a boon for US domestic companies. Both Republicans and Democrats are voicing concerns the new tax initiative lack specifics and fails to address how the White House plans to cover the shortfall from the drop in US corporate tax.
Angela Merkel of the Christian Democratic Union party has secured her place as German Chancellor for a fourth term. Whilst this election outcome was widely predicted, the euro has been shaken by how close the race to the Bundestag was. Merkel’s CDU party took 32.7% of the vote which is an 8% slide from the 2013 election and represents the worst result for her party since 1949. Election momentum was, instead, swinging towards the nationalist, right-wing “AfD” party that took 12.6% of the vote on a manifesto of anti-immigration. The last right-wing party to have a seat in the Bundestag were the Nazis, this uncomfortable fact and the failure of Merkel’s centralist party to take a sweeping majority is what is drawing the markets attention. Despite the fall in the Euro, futures markets for Europe have the main borse’s staying relatively flat at the open.
The US Federal Reserve voted yesterday to keep rates steady but indicated it was open to the idea of one further interest rate hike in 2017. FED commentators are lending the greatest probability of a 0.25% hike to the US base rate coming this December. However, ahead of the meeting, markets had already priced in a 50% probability of a December hike which left the actual stock market reaction somewhat muted despite a near 1% rally in the dollar. The main announcement from FED chair Yellen was the intention to begin paring back their multi trillion dollar balance sheet as soon as next month. The announcement, whilst largely anticipated, marks the beginning of the end to an era in which central banks were forced to take extraordinary steps to protect their economies from the worst financial meltdown in modern history.
Despite a vote of seven against two to keep UK interest rates on hold at historic lows of 0.25% at this month's Monetary Policy Committee (MPC) meeting, the Bank of England has today indicated strongly that it is ready to begin lifting rates later this year. The MPC has also predicted that inflation is likely to reach over 3% in October, well above the 2% target, and is likely to remain above target for the next few years. The intention to hike rates was caveated, however, with the guidance that should there be a concatenation of bad economic data in the interim, a 0.25% rise would have to be reconsidered. The news has surpassed market expectations, with Sterling rising around 1% against the US Dollar, Euro and Japanese Yen immediately after the announcement. UK government debt has also seen a strong sell-off, with yields rising to their highest in over a month as prices fell. In equities, the FTSE 100 has fallen almost 0.9% as a stronger currency weakens exporters' profits.
Data released by the Office for National Statistics showed the UK unemployment rate for the three months to July had fallen to 4.3 per cent, its lowest level in 40 years, indicating an increasingly strong labour market. In contrast, wage growth disappointed with average weekly earnings excluding bonuses growing at 2.1 per cent over a three-month period, well below the 2.9 per cent inflation rate last month. This shows that the value of people's earnings has in fact fallen, despite the figure being higher than the same period in 2016 and up from 2 per cent in the three months to May. The mixed data could further divide the Bank of England's Monetary Policy Committee on when to raise interest rates, as stagnant wage growth suggests a pullback in inflation may occur, however low unemployment indicates a strong economy which could drive inflation higher. Sterling reacted negatively to the news, easing off recent highs, while UK debt markets benefited from rising prices as yields fell.
Month-on-month inflation figures for the UK have beaten forecasts today, coming in at 0.6% ahead of the 0.3% consensus, bringing the year-on-year figure to 2.9%. FX markets have seen Sterling rise strongly against peers, with it currently up 0.84% against the US Dollar, 1.03% against the Euro and 1.22% versus the Japanese Yen. The converse effect has been for the FTSE 100 index to fall into the red, currently down -0.23% as exporters see their profits fall. The news also has potential to affect this week's Bank of England policy meeting, with the expectation being that a more hawkish mood could result from the higher than expectation inflation figures. Today has also seen the EU repeal bill make it through its first round of voting in the House of Commons - a piece of legislation that will overturn the 1972 European Communities Act and see the UK adopt EU law into its own, thus severing the UK from European law. It will now go through a second vote for 157 amendments to be debated.
Mario Draghi, president of the ECB, has today announced the decision to keep the bank's main refinancing rate at the historical low of zero. Draghi also signalled that the main decisions regarding the process of phasing out the 60 billion euros-a-month bond-buying scheme will be made in the next meeting in October. He said that the strong euro is weighing on the central bank's considerations about scaling back its monetary stimulus by acting as a 'source of uncertainty'. Growth forecasts were revised up from 1.9 per cent to 2.2 per cent for this year, while the stronger euro has caused the ECB to revise downwards its inflation forecasts for 2018 and 2019. Draghi's remarks on the euro led to its strengthening, while the decision to leave interest rates unchanged led European equity markets higher. European government bond yields dipped after the announcement, with debt benefiting from the rise in prices as yields fall.
Geopolitical tensions are once again at the forefront of markets on Monday, after North Korea successfully tested what is suspected to be a hydrogen bomb capable of riding a long-range missile, leading to reports that Pyongyang is preparing a major advancement in its nuclear capabilities. The US responded with threats to use its missile defence system, Thaad, which has never been used against an enemy before and which China sees as a threat to the region’s ‘strategic equilibrium’. South Korea’s President Moon has shown his support of this, calling for a review of US and South Korean military planning to counter the nuclear threat. President Trump has also threatened to increase economic sanctions and halt trade with any nation doing business with North Korea. Gold hit an 11-month high, while other haven assets including the yen and Treasuries rallied once again, as investors moved to safety. European stocks followed Asian equities lower, as investors move away from riskier assets.
Haven assets such as gold and the yen were boosted on Tuesday after a ballistic missile was launched from North Korea's capital, Pyongyang, triggering a response from President Donald Trump who reiterated that 'all options are on the table' in terms of halting North Korea's nuclear and missile program. Investors in Asia took risk off the table which meant stocks suffered, while the yen strengthened to its highest level against the dollar since mid-April and gold was up as much as 0.9 per cent in Asia trading to its highest level since November as investors sought haven assets amid the uncertainty.
Spanish police have reported a potential terror attack in Barcelona’s Las Ramblas district. Reports from the scene said a white van mounted the pavement and drove into the crowds in the tourist district resulting in as many as thirteen fatalities. The attacker has reportedly fled the scene on foot. Police also shot and killed five terrorists wearing explosive belts in a town south of Barcelona In which is believed to have been a secondary attack. Futures markets in Europe are all negative today as investors stand away from the European market on the news.
UK inflation data released yesterday showed prices rose by 2.6% last month, just below analysts’ expectations of 2.7%. The rise in food, clothing and household goods prices was offset by the 1.3% fall in fuel prices. Meanwhile, wage growth for the second quarter rose to 2.1%, above estimates of 2%, while unemployment came in better than forecast at 4.4%. This helped to dampen the concerns about a deterioration in living standards in the UK, which was highlighted in data released showing a fall in UK consumer spending in July for the third consecutive month, according to analysis of Visa card payments. The weaker-than-expected data on Tuesday sent the pound to its weakest level against the euro since October and to a five-week low against the dollar. The positive data released today is helping to lift the currency from these lows. In contrast, the American consumer remains healthy, with US retail sales in July rising the most in seven months, sparking a rally in the US dollar.
Investors are taking risk off the table today, after another standoff between the US and North Korea resulted in President Trump threatening ‘fire and fury like the world has never seen’. The situation was escalated when North Korean leader, Kim Jong Un, said he was examining an operational plan for firing a ballistic missile towards Guam, where an American military base is situated. Haven assets such as gold and the Japanese yen rose, while the Vix volatility index moved off its lows, to the highest level it has been in a month. European equities fell following their Asian counterparts lower on the news, while sovereign bonds were in demand, sending yields on debt lower.
It has been yet another bumper month for US payrolls, which shows job gains of 209,000 in July, above market estimations of 183,000. With equity and currency markets reacting positively on the news, the figure is yet another indicator of the world's largest economy continuing to show healthy signs of a sustained recovery. For FED chair, Janet Yellen, this figure will add further weight to the argument that the US is ready for a third rate hike in 2017.
The dollar saw another bout of weakness as US GDP data released for the second quarter showed the world’s leading economy expanding at 2.6 percent. This was an expansion but not the expansion the market was hoping for. The underwhelming GDP print combined with a stubbornly low rate of inflation has cast the possibility of a third rate rise in the US into doubt and this is what appears to be moving market sentiment. With the dollar trading lower and US treasury yields continuing to sell off both the market and the FED are in wait-and-see mode for the remainder of the third quarter.
Last night’s meeting of the Federal Reserve saw US FED chair Janet Yellen set an overly dovish tone on the trajectory of US monetary policy. Markets pushed aside her comments on possibly shrinking the $4bn FED balance sheet as soon as September and instead chose to latch onto her acknowledgement that core US inflation targets were remaining softer than expected. This acknowledgement sent a message to markets that a 3rd rise in the US base rate might not happen this year. The S&P, Dow, and the Nasdaq all responded to the news by closing yesterday’s trading near new highs whilst the dollar fell to a 14 month low on the news. Whilst a 3rd rate hike is not off the cards the FED has sent a clear message that any remaining rate hikes for the year will be very much data dependant.
Economic growth has risen marginally in Q2, up from 0.2% in Q1 to 0.3% in the three months to June. Year-on-year, growth has fallen from 2% to 1.7%, showing a slowdown is taking place, but nonetheless reflects a resilient economy considering inflation has been picking up throughout the year. Whilst the GDP figures were in line with average forecasts, new UK mortgage approvals have slightly beaten forecasts, with total mortgage borrowing remaining relatively flat at around £13 billion. 40,200 new mortgages were approved in June, down from 40,287 in May. Other borrowing such as personal loans have fallen slightly (around 1%), yet annual growth in credit card borrowing has remained flat at 5.5%. Today's releases come as little surprise, allowing UK equity markets to continue making gains today and for UK bonds to see strength. Sterling is relatively flat against major currencies ahead of the US Federal Reserve Meeting later today.
As expected, the European Central Bank (ECB) has announced it will leave interest rates unchanged in its press conference held earlier today. Mr Draghi reaffirmed the view that Europe still has plenty of way to go in its recovery and a substantial amount of stimulus is still needed to support this growth, downplaying his hawkish comments on the eurozone recovery made at the end of last month. Mr Draghi has also said there is no specific date when the ECB will think about a change in its bond buying programme, but pledged to step up its 60 billion euro-a-month quantitative easing programme if necessary. The euro is up 0.4 per cent on the day against the dollar, as the market absorbs Draghi’s announcement. The Bank of Japan has followed the ECB by leaving its monetary policy on hold and has pushed back its inflation goal by a year, to 2019. Comments referring to a weaker than expected consumer price index in Japan caused the yen to slip 0.2 per cent against the dollar.
Inflation in the UK ran at 2.6% in June, year-on-year, coming as an unexpected fall from 2.9% the previous month. The primary reason was attributed to lower oil prices after recent falls in the commodity price, yet items such as food and clothing are still increasing for the consumer. The news, which does not bode well for the Bank of England hiking interest rates any time soon, has weakened Sterling against major currencies to a degree, though comes in the midst of an otherwise turbulent day in FX markets. UK government debt became more attractive as the less likely rates are to rise, the more valuable fixed interest investments become. The FTSE 100, however, saw downward pressure and was down about 0.25% for the day.
Last night in Washington the Republican party abandoned their latest attempts to repeal Obamacare. The Republicans were forced to admit that after a 6 month battle with the repeal act they were unable to get it passed. In what has been seen as another setback for the White House political commentators are speculating about Trump’s fall in approval ratings and his ability to complete anything during his term as president. Markets reacted accordingly with the dollar selling off against all major currencies with European markets expected to open lower today.
US employers added another 222,000 jobs over June. The figure surprised on the upside as markets predicted a figure of 178,000. Average hourly earnings rose by 2.5% but missed estimates of 2.6%. With the US now drawing ever closer to full employment markets are asking how much longer can the US jobs market continue to deliver forecasting busting employment numbers. Low wage inflation with an ever tightening labour market has left investors speculating on how this effects the FED’s path of rate hikes. Equity markets notched up on the news with US debt seeing some short term weakness.
Markets are treading softly today after the announcement that North Korea have successfully test fired a long range ICBM (inter-continental ballistic missile). The missile flew for 40 minutes and splashed down in international waters just 200 miles from Japan with no reported damage to any vessels in the area. With the latest test being the 11th launch from North Korea this year, President Trump called on Asian leaders to “end this nonsense once and for all”. With the US closed for Independence Day markets in Europe appear to be taking the news in their stride with no large negative moves.
Sterling pushed higher yesterday on the news that Mark Carney, Governor of the Bank of England, would vote to raise interest rates should business investment increase in UK. This represents a small but significant hawkish shift from the Governor who has, until now, voted with the majority of committee members to keep rates either where they are or to take them lower. The comments come as the UK faces increasing inflationary pressure yet after Carney said only last week that now is not the time to raise rates. UK government debt came under increased pressure as markets sold bonds, an asset that becomes less attractive as interest rates increase, and has seen this sentiment extend into today's trading. Yesterday's and today's movements in Sterling saw the FTSE 100 let go off gains, sending the index into negative territory.
Mario Draghi, President of the European Central Bank (ECB) has indicated that the time may be approaching to start reducing the long standing asset purchase programme (QE) in the Eurozone, saying 'All the signs now point to a strengthening and broadening recovery in the euro area,' but that monetary policy must be kept constant for the time being. Signs of reflation were mentioned, but that the recovery is not quite stable enough yet to take firm action. This small shift of sentiment has been enough to cause waves in EU markets, particularly in bond markets where prices have been falling as the outlook for the supported asset class potentially worsens. The Euro is also showing strength against major currencies, which is in turn hurting European stocks that rely on exports, edging European markets off of recent highs.
The Conservative government has reached a deal with the DUP party in order to secure a majority in the Houses of Parliament, offering a degree of certainty going forward into early Brexit negotiations. The 'confidence and supply' deal allows May's government to pass legislation contained in the Queen's speech and budget, though likely at the cost of significant incentives for the DUP, including not least, giving priority to the issue of a potential post-Brexit hard border in Ireland. Details are expected to follow soon. UK equities have seen a rally, despite a strengthening pound acting as a headwind for FTSE companies that earn overseas. Hours previously, data released revealed that UK consumer spending has slowed year-on-year from 6.4% growth in April, to 5.1% in May, showing a continuing downtrend in the quality of UK economic data. This briefly dented Sterling, though news of the Government deal has aided a rebound and allowed it to hold above major currencies on the day.
Another potential terrorist incident in London has occurred in Finsbury Park in the early hours of Monday morning. A van reportedly drove into pedestrians outside a Muslim welfare house, 1 person has been killed with several more injured. Bystanders tackled the perpetrator to the ground who was later arrested. The attack is believed to have been aimed at a Muslim community during the holy month of Ramadan and is the fourth terror incident in the UK in recent months. The police have yet to confirm this is another terrorist incident.
Emanuel Macron’s En Marche party has secured a sweeping majority in France’s second round of parliamentary elections winning a total of 350 seats out of the total 577. Marine Le Penn, the main presidential opponent to Macron secured just 9 seats. With national turnout at just 43% this was a record low for voting numbers, none the less the majority Macron now has allows the President to begin implementing his big French reform agenda. Finally, Philip Hammond, UK Chancellor of the Exchequer reaffirmed that the UK will leave the single market as well as the customs union when it withdraws from the EU. This quashes the hopes of some UK business leaders that the Chancellor might champion an attempt to soften the type of Brexit we negotiate for in Brussels.
Expectations for a UK interest rate rise have jumped sharply following today's meeting at the Bank of England (BoE) where the closest vote in six years was had. Three members of the Monetary Policy Committee wished to raise rates this month from their record lows citing rising inflation, causing market expectations for a rise next month to jump to around 50%, up from 10% before the meeting. The FTSE has already come under pressure today from continued post-election fallout, recent downbeat economic figures and troubles in the mining sector that makes up a significant share of the FTSE 100. UK government debt has come under particular pressure as the idea of an interest rate rise makes fixed interest assets less attractive, leaving the UK 10 year yield, which moves inversely to price, up over 10% on the day. Sterling has reversed losses on the day and strengthened from the news of heightened rate hike expectations.
The US federal reserve has, for the second time this year raised the countries base interest rate from 1 to 1.25%. The move has come in the midst of a string of weak inflation numbers prompting the FED reiterate they expect inflation to normalise at 2% but confirmed they are watching it ‘very closely’. Markets were quick to note the dropping of any reference regarding a concern from overseas markets indicating a more optimistic global outlook from the FED. Central bank policy makers indicated they were still on course for another quarter point increase this year and fully expected this to continue into 2018. The dollar regained some strength on the news as stocks remained muted.
Theresa May has reached a deal with the Democratic Unionist Party (DUP), allowing the Conservatives to form a coalition government with enough combined seats to proceed with their legislative programme. The support of the DUP's 10 seats will bring the combined majority to 328 and leaves the remaining parties no chance of forming their own majority. The Prime Minister has argued that this coalition is the best means of ensuring certainty through Brexit negotiations, which EU leaders have been quick to point out will still be worked to the original timetable. Sterling remains under pressure from today's election result, though the domestically focused FTSE 250 index has recovered earlier losses and is now up marginally, whilst the wider FTSE Allshare index has gained 0.86%, mainly due to Sterling weakness
James Comey, former FBI director, has given a much anticipated testimony to the US Senate in which he describes a 'disturbing' number of one-on-one meetings with the President, almost entirely centred on the matters of ex-National Security Advisor, Micheal Flynn, Comey's tenure and potential investigations into Russian ties throughout the 2016 Trump election campaign. The ex-director was questioned for many hours and covered several other issues, including the treatment of investigations into Hilary Clinton's emails and President Trump's alleged request for Comey's loyalty. President Trump has today tweeted that he now feels vindicated of any wrongdoing and that Mr Comey has made 'many false statements'. US markets finished up on the day and the US dollar remains strong, showing that the testimony is not being perceived by markets as a significant development at this point.
The UK’s snap election has ended in a hung parliament this morning with the current Conservative government taking just 315 seats, down 11 seats from their previous majority. Labour took 261 seats, up 29 from their previous count. Mrs May called the snap election to cement her standing within the current UK government, this strategy has very much backfired amid calls from the Labour party for Mrs May to now resign. The job for the Conservative government will be to begin constructing a coalition of supporting parties to form a majority and continue with the job of exiting the UK from the European union. The pound fell against the dollar by 2% in overnight trading with futures predicting the UK all market will begin to sell off at the open. Political commentators are however speculating that a hung parliament will allow smaller parties with a softer vision of Brexit a greater voice in the commons which should allow for a softer Brexit which is something markets will take positively.
On Saturday night, a rented van drove at pedestrians over London Bridge, the assailants then got out and began a knife attack in the bustling area of Borough market killing 7 and wounding 48 before armed police shot and killed the perpetrators. This, the second terror attack on British soil in an many weeks has failed to deter the general election from taking place on Thursday of this week. Prime Minister May said ‘We cannot and must not pretend that things can continue as they are’ she vowed to step up Britain’s fight against Islamic extremism. Mrs May is calling on global tech companies to end the ‘safe space’ on the web where a lot of atrocities across the world are planned.
US jobs data released today, less than two weeks before the next Federal Reserve meeting, showed that employers added fewer jobs than expected in May. Employers added 138,000 jobs in May, which was less than Wall Street’s expectation of 182,000, while April’s gain of 211,000 was also revised lower to 174,000. This contrasts with the fall in the unemployment rate, derived from a separate survey of households, to 4.3% from 4.4%. Following the announcement, the US dollar and 10-year Treasury yield fell to their lowest levels since the election of Donald Trump last November. Though this was not what financial markets were expecting, it is still believed that the Fed will raise interest rates in their next meeting given that the US is near full employment, although it has brought into question the trajectory of rate rises for the rest of the year ahead.
President Trump has announced that the US, the second biggest emitter of greenhouse gasses after China, will be pulling out of the Paris Agreement – a pact aimed at tackling climate change. Trump claims the deal unfairly disadvantages the US, costing over 6 million jobs and US $3trillion in GDP, but that he may also be willing to renegotiate an alternative. The US now joins Syria and Nicaragua as the only countries not supporting the deal, but will not be able to officially leave the agreement for about 4 years. The move has sparked uniformed condemnation from world leaders who have responded by reaffirming their commitment to the agreement, and in some instances pledging to increase their efforts. The long term implications for the US remain unclear, though it is expected Trump will now push to reinvigorate US coal and increase crude oil exploration, an expectation weighing on oil markets today as the price per barrel of Brent Crude falls below US $50.
Just 8 days before the UK’s snap elections, seven party leaders gathered for a televised debate to outline their view for the UK. However, the absence of Prime Minster May dominated the debate as the other party leaders took time to lambast her absence as evidence she was unfit to lead the country. In her stead the Home Sectary, Amber Rudd stood in, rationalising her absence by stating Mrs May was occupied preparing for Brexit negotiations. Commentators prised the Home Sectary on her performance under pressure coming from the seven other party leaders. Today Mrs May will endorse the message that Brexit is a ‘national mission for the UK’ and to get it right will enable the UK to become a ‘confident, self-governing country once again’
UK GDP growth for the first quarter of 2017 has been downgraded from 0.3% to 0.2% by The Office for National Statistics (ONS), showing the economy to be growing at a slower rate than previously thought. The ONS highlighted consumer-facing industries such as retail and accommodation to be detractors and that rising prices were playing a part as household spending fell. FTSE equities are showing little reaction hours after the news and are currently trading flat, with Sterling only seeing slight depression. UK Government debt is being bought, sending yields downwards, however. The oil cartel, OPEC, has also today agreed to extend production cuts in a bid to strengthen the price of oil, coming as good news, yet perhaps not good enough as markets also hoped for the depth of production cuts to be increased. This has left oil being sold today after some strong gains over the last week
A suspected terrorist suicide-bomb attack at the Manchester Arena following a pop concert has left 22 dead and many more injured – the worst attack of its kind since the 7/7 London bombings. Politicians have responded in solidarity by halting election campaigning for the day and Prime Minister, Teresa May, has announced the UK general election will also be postponed for 24 hours. EU leaders have begun sending their messages of condolences after the second terrorist attack on British soil in a little over a month.
Events unfolding on the US political scene have given markets pause for thought as many equity markets continue to fall for a second day, though in the US equity futures are suggesting yesterday's sharp fall has been stemmed for now. The news that President Trump may have requested ex-FBI director, James Comey, to drop investigations into possible ties between his campaign and Russia has seen markets favour safe haven assets such as government debt and gold. This reaction is a reflection of growing concerns that Trump's pro-business policies, such as lowering tax, may be stalled yet again – or in the worst case, fail to reach fruition. European equity markets were particularly hard hit by US political turmoil after strong gains as of late, and today the UK's FTSE All Share continues to extend losses, compounded by a strengthening pound in light of surprisingly positive retail sales data. For the first time since last September, Sterling is trading above $1.30 against the US dollar.
Last night French Presidential candidate Emmanuel Macron swept to victory to become France’s next President. The youngest ever President at just 39 years old won with 66% of the vote against Marine Le Pen of the Front National who took 34% of the vote. The Euro jumped in Asian trading after the news broke, likewise, markets in both Europe and UK open higher today on the news that political volatility in Europe has dramatically decreased on the news that France will continue to be governed by a pro-EU candidate. All eyes now look to the ECB for more direction on future monetary policy in Europe.
US payrolls data released today shows 211,000 jobs added in April, which is over 20,000 more than forecast and significantly more than the 79,000 jobs added in the month of March. The unemployment rate, which was expected to rise from 4.5% to 4.6%, unexpectedly fell to 4.4% and is now the lowest it has been since May 2007. The majority of these employment gains were concentrated in services, while manufacturing and construction jobs also rose, but at a weaker pace than the start of the year. The data shows that the US labour market remains healthy and signal positively for continued increases in consumer spending. Wage growth was the weakest part of the report, rising 2.5 per cent year-on-year, from 2.6 per cent in the previous month. The data add to the expectations that the Fed will raise interest rates next month, though Treasury yields initially fell, reacting to the softer wage growth data, before rebounding swiftly after.
Emmanuel Macron and Marine Le Pen faced off in the first head-to-head televised debate of the campaign on Wednesday. The debate served to highlight the stark differences in their visions for the future of their country. Macron underlined security and tackling terror as a priority, accusing Le Pen of being complacent about the subject, while Le Pen accused Macron of being 'the candidate of savage globalisation'. He responded by referring to Le Pen as 'the high priestess of fear'. The pair also clashed on the future of the EU. Le Pen said she would call for an in-out referendum on EU membership, restoring France's national currency and giving companies and banks an option on which currency to pay in, however Macron thought this idea was 'nonsense'. Overall, it appeared Macron cemented his position as front-runner in the debate, as he was generally regarded as the most convincing candidate. European equity markets and the currency are up, reflecting a generally optimistic tone.
The US Federal Reserve has kept interest rates on hold in the range of 0.75 per cent to 1 per cent as expected, however they have left open the possibility of raising them next month. The reason for keeping monetary policy unchanged was due to a slowdown in growth during the first quarter of the year, however the Fed are generally optimistic about the overall health of the US economy, with the view that this slowdown in growth is more likely to be transitory. They highlighted the strength of the labour market, solid consumer spending and business investment and inflation which is close to their target rate. The probability that the Fed raises rates by 0.25 per cent next month has risen to 90 per cent and this has been reflected in bond markets, with Treasury yields moving higher as markets price in a June hike.
As President elect Trump comes up to his first 100 days in office the US released GDP data showing lacklustre growth figures for the first quarter of 2017. GDP grew at just 0.7% in Q1 2017, this growth figure is the slowest three month growth figure since 2014. Growth figures were dragged down by a falloff in consumer spending on big ticket items such as cars and televisions. Positive growth areas came from international exports, business and housing investment. This slowdown in growth will give both the White House and the Fed plenty to think about when it comes to recent tax reform proposals and the next date of a proposed interest rate hike.
Results for UK GDP growth in the first quarter show the economy grew only 0.3% to 2.3%, less than half the rate of growth from the same period in 2016. The weaker rate of expansion may point to the effects weaker Sterling has had on UK price inflation and spending power. Despite the disappointing figures, the economy remains resilient in the face of Brexit and it is likely the Bank of England will continue to keep monetary policy highly accommodative throughout 2017 in order to steady the economy. UK government bonds are seeing moderate selling and the FTSE All Share is down 0.2%.
Yesterday President elect Donald Trump announced a raft of amendments to the US tax structure. The tax amendments were touted by the White House as the biggest in US history. A sharp reduction in corporate taxes from 35% to 15% and a simplification in the tax bands on individuals were at the centre of the cuts. What was also on the table was a ‘one time’ reduced corporate tax rate to induce US companies to re patriate trillions in profits being held overseas. With investors being underwhelmed by the lack of clarity in the specifics, commentators have begun to speculate that the announcement was more a statement of intent rather than a detailed set of cuts.
Yesterday French voters headed to the election polls in the first of the two rounds to elect a new French president. Out of the five candidates running for office it was centralist and pro EU candidate Emmanuel Macron who came out on top with 23.9% of the national vote and far right leader Marine Le Pen coming in second with 21.4% of the vote. France will once again head to the polling booths on May 7th to decide who of these two will take up the French presidency. Polls for the second round have put a 60% probability of centre candidate Macron coming out victorious. Gold and other haven assets sold off on the news whilst the Euro strengthened 1.8% against the dollar as investors’ fears around the election outcome subsided. With the prospect of an extremist party governing France now looking increasingly unlikely it appears to be a risk on environment for European equities.
The UK Prime Minister, Theresa May, will be presenting a motion to the House of Commons tomorrow to call a snap general election on the 8th of June. May has accused the UK's other political parties of jeopardising the outcome of Brexit negotiations and argued that calling an election now will help provide stability throughout the next few years. Sterling saw some volatility following the announcement but ultimately rebounded above pre announcement levels. The FTSE 100 has begun to extend earlier losses and could be expected to see increased volatility in the run up to the election.
Under the proviso of protecting US national security, President Trump last night ordered two US destroyers in the Mediterranean to launch a salvo of 59 Tomahawk missiles aimed at the Shayrat air base. The base is home to Assad's Syrian air force and where the recent gas attacks are believed to have been launched from. The US strike been seen as a clear indicator the Trump administration will not be playing by the same rules as the previous administration. Markets went long haven assets with Gold, Yen and US treasuries all rallying strongly overnight in Asian trading. European equity markets have opened lower today on the news.
Last night saw the second round of the French presidential debate which, over 3 hours saw the 11 candidates’ discuss foreign policy, terrorism, economics and EU membership. Latest polls suggest the winner was far left leader Jean-Luc Mélenchon with 25% of people believing he was the most convincing. The two leading candidates clashed on the Eurozone policy. Centre candidate Emanuel Macron accused far right candidate Le Pen of wanting to start a an ‘economic war’ in her pursuit of taking France out of the single currency. With recent polls suggesting that 25% of the French electorate are still undecided on a candidate there is all to play for in the run up to the first round of voting on the 23rd.
Prime Minister Theresa May, last night, signed the historic letter signalling Britain’s intent to leave the European Union. At 1.20pm today, Sir Tim Barrow, Britons ambassador to the EU will present Donald Tusk, the European Council President with the letter of intent. Prime Minister May was keen to stress her intent to build bridges with EU nations in what has been seen by many as a softening of rhetoric from No.10 in an attempt to smooth out the exit process. Sterling has seen some weakness in Asian markets as global investors seek to distance themselves from the currency ahead of the issuing of Article 50 later today.
President Trump, on Friday, failed to secure backing from congress on legislation to repeal former President Obama’s Affordable Care Act. Main opposition came from a group of staunch conservative Republicans called the ‘Freedom Caucus’. The US dollar and the S&P 500 sold off in the wake of the result, European markets have also opened up lower today on the news. Failure to repeal Obamacare has been seen by markets as a stumbling block to the President being able to deliver on the reform agenda he was elected to introduce, this is causing some nervousness. The White House was keen to move on from the blow, with Chief of Staff Reince Priebus, announcing the president would be moving onto tax reform.
Consumer Price Index figures have beaten the consensus 2% forecast for February, revealing inflation running at 2.3% year-on-year. This compares to January's rate of 1.8% and represents the first time since 2013 that it has exceeded The Bank of England's 2% target. Sterling has seen strong gains against major currencies such as the US Dollar and Japanese Yen in the immediate wake of the news, gaining 0.85% against the US Dollar and helping to send the US Dollar Index - a measure against a basket of its peers – below 100 for the first time since February. This appreciation will contribute to a muted day in the FTSE 100 as foreign earners see their profits contract, with the index down 0.22% at the time of writing. UK government debt is also seeing a strong rise in yields today (which move inversely to price) as investors move away from the assets that are the most likely to be eroded by inflation.
Monday night saw the first round of Presidential debates held in France. In what was seen as a lively debate, candidates traded repeated blows on the French economy, Eurozone membership and Islam, as well as a good measure of personal jibes. Polls taken just after the 3 hour debate put Mr Macron of the ‘En Marche’ party as the overall winner despite the ex-economic minister taking flack on his suitability to govern the country at just 39 years of age. The French electorate are set to head to the polls in a little over a month for the first round of voting. Latest polls have both Le Pen of ‘Front National’ and Mr Macron of ‘En March’ having 26% and 26.5% of the vote respectively. Mr Macron looks set to take the presidency in the second round.
Geert Wilders' far-right party has failed to defeat the centre-right Prime Minister, Mark Rutte, in the Dutch general elections yesterday, allowing EU markets to breathe a sigh of relief as worries over growing populist movements subside for the time being. Wilder's party have come in second place, losing by a wide margin, yet Rutte's VVD party has slipped by 8 seats in parliament. This morning the Eurostoxx 50 index, a representation of EU-wide blue chip companies, has gained around 1%. The Euro index, which measures the currency against a basket of its peers is down modestly by 0.1% at the time of writing and may remain volatile throughout the day.
The US Federal Reserve chair, Janet Yellen, yesterday evening announced the first US interest rate rise of 2017. The rise saw the US base rate move up from 0.5% to 0.75%-1%. This signals the first of what is widely expected to be 3 rate hikes in 2017. She did however temper any jubilance in markets by releasing a very cautious message extoling the virtues of vigilance and positive data in today’s uncertain world. It was this cautious tone that caught a predominantly jubilant market off guard. None the less, with the Federal Reserve definitely picking up the pace of increases, markets believe this to be indicative of the world’s largest economy being firmly on the path to economic recovery. Markets have reacted positively to the news with the S&P 500 rallying 0.8% off the back of the news but the dollar failed to strengthen given Yellen’s overly cautious tone. Markets will be looking towards the next set of employment figures out in April as the lead indicator for where the FED goes from here
Chancellor Phillip Hammond, today, announced his intention to scrap the proposed increase in National Insurance tax on the self-employed introduced a week prior in the spring budget. Despite the loss of £500m a year the amendment has been seen as a politically fuelled U-turn to stem the backlash from the party back benchers on breaking a Conservative 2015 election promise not to raise the tax burden on the self-employed.
Yesterday Prime minister May defeated parliamentary opposition to the issuing of Article 50. The defeat enables her to start exit negotiations in Brussels at the end of the month as anticipated. The amended bill passed through the House of Lords a second time, unimpeded. Nicola Sturgeon, leader of the Scottish National Party took the opportunity to demand a second referendum on Scottish independence before the two year exit negotiations conclude. Commentators widely expect May to comply with this but only after the UK has concluded EU negotiations ensuring she is not fighting on two fronts. In an otherwise flat market, UK stocks are up modestly on the news, while Sterling has seen significant weakness as markets again turn to the pound to express their negativity. This ongoing depression in the pound continues to contribute to portfolios overseas investments.
US Non-farm Payroll figures for February surprised markets with the addition of 235K new jobs. The figure is 23% higher than the consensus forecast of 190K. This came with an acceleration in wage growth of 2.8% with the largest increases being seen across the construction and manufacturing sectors. February's robust numbers forced market expectations for a March rate hike to rise off the news. In opening trading US stock markets reacted positively to the news
Mario Draghi, President of the European Central Bank (ECB) announced today that, not only will they be keeping European interest rates on hold, but that the central bank will also be standing ready to increase its asset purchase program (QE) should it need to. QE, which was meant to be tapered towards the end of 2017, could now be extended longer as it is claimed to be showing material benefits to the EU economy. EU GDP forecasts have received a slight increase, up 0.1% to 1.8% for 2017, whilst inflation has also been forecast higher to 1.7% for the year. The news sparked Euro strength and rallied EU equity markets in the immediate aftermath.
The UK's 2017 Growth forecast has been upgraded from 1.4% to 2% as Philip Hammond delivered the Spring Budget today. Forecasts for 2018 to 2019 have been cut marginally, however, yet the prediction for 2% growth in 2021 still stands. Other key points included an accelerated reduction in net public borrowing, particularly for the current financial year, and a rise in National Insurance contributions that will hit the self-employed, potentially raising significant revenues for the Tax Office. Sterling, which depreciated in the today's run-up to the Budget, has failed to recover fully and stands around 0.18% lower against the US Dollar and 0.14% down against the Euro at the time of writing. UK equity markets remained upbeat on the prospects and notched a 0.16% move up on the announcement. UK government debt began to see some weakness as prices sold off over 4%.
In his first address to Congress, Donald Trump appeared poised and presidential, which has no doubt given a boost to his popularity, however he delivered little in the way of specifics with regards to his policies. He offered little insight into the details of his proposed corporate tax cuts, border taxes or plans to loosen financial industry regulation. However he did reiterate the promises he has made to get these plans underway and also voiced support for Nato. The response from financial markets was muted, suggesting that all markets, including equity markets, will be wanting more details from Trump regarding his policies. With this said, his speech has been considered by many as one of his best performances as a speaker and leader, being his most substantive thus far with an overall optimistic tone which is hoped will create momentum after a shaky start to his term.
Minutes released today from the US Federal Reserve’s January policy meeting have revealed that many of its members are ready to raise interest rates again in the near future. Other members, however, expressed concerns about uncertainty over the effects of President Trump’s policies – such as tax cuts and fiscal spending – and maintained that the central bank should be prepared to take action if the US economy falters from its recent strong performance. The next meeting is due on the 14th March, at which time futures are pricing in a 34% chance of a rate hike, showing a degree of scepticism. The market reaction has been relatively muted as equity markets stall to an extent. The UK FTSE 100 is flat off the news, yet European markets are creeping upwards. In the US, Futures suggest equity markets will rise marginally, whilst US bond yields are falling as safer assets are bought.
Odds of the US Federal Reserve increasing interest rates in March have increased after US inflation data came in above expectations at 2.5% for January, up from 2.1% previously. As inflationary pressures mount, so too does pressure on the Federal Reserve to continue normalising interest rates. Robust economic data at this stage adds weight to the US central bank's hawkish view. US data on consumer spending grew for the fifth consecutive month in January, showing that the change of presidency has yet to have a material negative impact on consumer habits. US industrial production fell short of expectations with a decline of -0.3% attributed to a strengthening US dollar. In the wake of these releases, the US dollar index, which measures the currency against a basket of its peers, saw weakness, whilst US stock markets were up on the day. US treasuries sold off as equity markets regained some confidence and safer assets were less in demand.
UK Inflation hit its highest level in two and a half years in January, reaching 1.8% and bringing it closer to the Bank of England’s target rate of 2%. The central bank expects UK inflation to rise to as much as 2.7% by the end of the year, brought about primarily by Sterling’s depreciation. Food and transport were areas where inflation was felt the most, with prices rising, and set to rise, in order to keep up with the growing cost of imports. Inflation above the Bank of England’s 2% target is likely to hurt consumers spending power, assuming wage growth is unable to keep up. For the time being, the central bank appears to maintain a neutral stance on interest rates and has indicated that it will tolerate above target inflation, given the current environment. As the news was released, the FTSE 100 index remained flat, yet bond prices were rising, showing a moderate risk-off move as investors preferred safer assets.
Today the UK welcomed fresh data that showed Britain’s trade deficit had narrowed by more than forecast in addition to industrial and manufacturing production beating expectations. This comes on the same day the UK had its rate of GDP growth upgraded from 0.6% to 0.7% for the three months leading to the end of January. Taken together, the UK economy has put on a real show of resilience since the vote to leave the EU and continues to surprise markets to the upside. Today, the FTSE 100 was up around 0.4% at the time of writing, whilst most other markets were less chipper. Sterling saw strength today, up against other currencies such as the Euro and the Japanese Yen, whilst it remained flat against the US dollar which remains the dominant currency. UK bonds continued to sell, sending yields higher.
Last night the UK government voted in an overwhelming majority of 494 votes to 122 in approval of the triggering of article 50. This flies in the face of previous speculation that the triggering of the treaty might be stalled in the House of Commons. The historic vote has been hailed as a victory for the nation who voted to leave the EU. Prime minster May managed to force a 3 line whip on the vote and quash a late rebellion from some of the more staunch remain MP’s. Labours attempt fell short with Mr Corbyn seeing 52 Labour MP’s vote against the bill.
US employers added a further 227,000 jobs to the US economy in January 2017 which came in above analysts’ expectations of 180,000. Sectors such as construction, retail and finance were amongst the biggest growth sectors. In contrast wage inflation in the US slowed to just 2.5% over January 2016, this figure came in below expectations suggesting there is still some slack in the US jobs market. Many market commentators continue to theorise on how President Trump intends to create another 25 million new jobs with the US labour market nearing full employment.
The Bank of England’s Monetary Policy Committee (MPC) has voted unanimously to leave monetary policy unchanged. The bank’s main interest rate will remain at its record low of 0.25 per cent and it will continue with its planned purchase of corporate bonds, which will rise to £10bn over the next year. The bank have also upgraded growth forecasts for the next three years, predicting 2 per cent this year- up from November’s 1.4 per cent forecast, based on forecasts that consumer spending will slow less quickly this year than was predicted in November, despite rising inflation. The pound, which had rallied after MPs late Wednesday voted in favour of giving the Prime Minister power to trigger Article 50, fell on the news. The FTSE 100 index was trading higher after the news that the UK economy will grow substantially faster than its downgraded forecasts made after the Brexit vote in June.
Wednesday evening saw Prime Minster May win a historic mandate to move forward with article 50 from the House of Commons. MP’s voted by 498 to 114 in favour of giving the Prime Minister the power to invoke the EU treat’s Article 50 exit clause. Across the Atlantic the US Federal Reserve opted unanimously to keep short term interest rates on hold at the start of 2017. Markets failed to react in any great measure to the announcement as the outcome was widely expected. The FED went onto signal that it remains on track for more rate hikes this year as the US continues to put on positive growth numbers as well as inflation continuing to head back towards its 2% target.
Over the weekend President Trump issued his most controversial executive order to temporarily block travel into the US from seven Muslim countries. This announcement has rounded off an extremely vocal first week in office. World leaders along with some of the world’s largest companies joined together in their condemnation of the executive order. The success of Prime Minister May’s trip to the US in which she strengthened the UK’s “special relationship” with the US was short lived as MP’s campaigned for the UK to rescind the invitation to host President Trump at Buckingham Palace later this year unless the ban is lifted.
The UK economy has beaten forecasts, growing at a rate of 0.6 per cent in the fourth quarter of 2016, above the 0.5 per cent figure estimated. This was mainly driven by strong consumer spending and expansion of the services sector, but the manufacturing sector also grew strongly and reversed much of the contraction of the third quarter. Industrial production was unchanged from the previous quarter. Overall, the figures show strength and resilience of the UK economy, which was in fact the fastest growing economy in the G7 last year, despite the political headwinds. However, it is important to note that much of this increase in consumer spending was debt driven and with the anticipation of interest rises and inflation in the future, demand for credit could slow and consumer spending may weaken. The pound sold off on the report over concerns that UK growth is being propped up entirely by services.
The UK Supreme Court this morning ruled by 8 justices to 3 that parliament must hold a vote on Brexit and that the government cannot use royal prerogative to trigger article 50. The ruling has put parliament firmly at the centre of the triggering of article 50. As a result, Theresa May is expected to push a brief bill through both houses of parliament to comply with the ruling. There still remains speculation that even a brief bill could be stalled should politicians wish to challenge the proposed exit strategy. Across the Atlantic President Trump sought to make an impact on his first day in the Oval office by following through with his election promises on protectionism via signalling the US economy would be withdrawing from the 12 nation strong Trans-Pacific Partnership agreement. He also reiterated his threat to punish US companies seen to be offshoring production overseas with a hefty boarder tax.
Donald J Trump begins his first week in the White House today. Friday 20th of January saw his inauguration as the 45th President of the United States of America. His tumultuous relationship with the US press surfaced again as he rubbished reports over low attendance at the inauguration ceremony. On matters of state, there still appears to be speculation about his first week in office as key positions within the president’s inner cabinet have yet to be filled. The president will this week meet with Theresa May to discuss all issues pertaining to Russia, NATO and a bilateral UK-US trade deal which will prove crucial to the UK as it attempts to negotiate its way out of the Eurozone.