General Market Commentary July 2018

Equity markets steered through a blizzard of corporate earnings announcements this month and emerged broadly in good shape, despite a disproportionate amount of comment directed at the lower guidance from Facebook. US corporates in particular are in rude health and Friday’s bumper Q2 economic growth number reinforced the view that the backdrop for businesses in the US remains favourable. Outside of North America, companies are also generally faring well. Results across a wide swathe of industrial sectors have been positive, while areas of commercial disruption are well understood and generally anticipated.

Last week’s GDP release confirmed that the US economy is firing on all cylinders, something that Donald Trump has predictably been quick to take credit for. The 4.1% annualised growth in Q2 was driven mainly by consumer spending spurred on by the recent tax cuts but a temporary surge in exports also helped. This sort of pace is unsustainable, but the US is likely to continue outperforming global peers which will lead to higher interest rates, something that Mr. Trump is less keen on judging by his recent tweets.

Closer to home, as the wheels on the latest version of the UK Brexit wagon start to wobble, it is right to question why the stock market remains sanguine about events so far. Although UK shares have made relatively little progress since the start of the year, they have recovered around 10% from the lows reached in March. Why? Much of this is to do with currency. The pound has fallen from over $1.40 in the spring to just over $1.30 at present. With a large number of the FTSE 100 companies reporting in US dollars, the fall in the value of the pound acts as a boost to earnings and dividends when translated back into pounds. In the event of a no-deal Brexit, the pound would be expected to weaken further, which in turn would bolster the more international names listed in the UK. Another reminder, perhaps, that the UK stock market is not an accurate barometer of what is happening within the economy.

At the end July and beginning of August central banks have been and continue to be in focus. The Bank of England looks set to raise interest rates to 0.75% tomorrow. A rate hike is 85% priced into the market and the MPC have noticeably failed to push back against those expectations in recent weeks. This may seem like bizarre timing given the massive political uncertainty over Brexit, but the Bank are worried about the lack of spare capacity in the economy and feel that now is a good time to move rates away from their emergency setting. Reinforcing its commitment to its program, the Bank of Japan made clear it would maintain “extremely low” interest rates for an extended period, dashing any hopes that it would join the world’s other major central banks in rolling back crisis-era stimulus policy.

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This information has been produced by Jordan Buchanan using data supplied by Quilter Cheviot, and from publicly available data sourced from Bloomberg.com