The Lowdown on Markets to 19th August 2016
World Markets at a Glance
In this week’s issue
- Global equity markets experience a mixed week seemingly correlated to the oil pullback.
- The markets will now focus on Janet Yellen and the forthcoming Jackson Hole seminar.
- A positive surprise in the UK retail sales figures helps to dampen down Brexit woes.
- The US dollar hits a seven week low against the yen and euro whilst sterling declines.
- Since the start of the month the price of crude oil has jumped by around 20 per cent.
- Markets continue to be captivated by the central banks as investors become complacent.
“The market focuses on the Fed’s next move, the dollar, and the oil price”
Global equity markets have had a mixed week ultimately pulling back from their recent highs as the US dollar recovered some of its composure, after hitting a seven-week low against the yen and euro, whilst the price of crude oil experienced a modest pull-back after soaring by approximately 20 per cent since the start of the month.
Other market concerns have focused around what the Federal Reserve Bank chair, Janet Yellen, might say in her address at Jackson Hole, Wyoming at the end of this month, given that there are some varied comments coming from other Fed members based upon the many distortions that are still currently affecting the global economy.
“The US economy continues to show good signs of recovery”
Clearly, the US economy continues to show good signs of recovery, and resilience, and as a result the appeal from some Fed members to raise US interest rates in September could be justified; however, there are external issues that could create some real problems for the biggest economy in the world over the coming months, such as the slowing down of the Chinese and Eurozone economies, and the question regarding the UK government, and the eventual actions it might take over Brexit.
Indeed, there were even rumours in the market place last week that the UK prime minister, Theresa May, might be thinking about invoking Article 50, the clause that will begin the UK’s formal exit from the European Union, as early as April next year. Equally, the prime minister has repeatedly said that Britain would not invoke Article 50 before the end of 2016, however, some ministers believe that the UK should take action sooner rather than later, and certainly before the forthcoming elections in Germany, Holland and France.
This of course, had an immediate effect on the direction of sterling, at a time when the pound had been showing some real resilience against a basket of leading global currencies, and on the back of the recent UK retail sales figures. Admittedly, foreign exchange markets were fairly volatile last week with emerging market currencies broadly weaker, and the US dollar falling momentarily below that physiological ¥100.0 yen level before rallying back.
“Britain’s shoppers have shrugged off uncertainties caused by Brexit with retail sales rebounding a month after the European referendum”
Just on the question relating to the UK retail sales figure for July, it would now seem that this recent number actually shows that Britain’s shoppers have shrugged off uncertainties caused by Brexit with retail sales rebounding a month after the European referendum. Evidently, this is further evidence that Britain’s decision to leave the EU has had a limited effect on the UK economy, be it short-term.
Clearly, these better figures were helped by the warmer weather conditions and the falling momentum of sterling, making it cheaper for overseas visitors to come to Britain for their holidays, and individuals taking advantage of the summer sales, given that money in the bank is yielding nothing and enticing people to spend their cash on items such as luxury goods. Also it would appear that year-on-year we have seen a pick-up in online consumer spending, and of course, going forward the recent launch of the “Night Tube” in London, making it a truly 24-hour city. Indeed, this is likely to provide further employment, and spending, in the UK’s capital city, in fact, it is estimated that it will add a further £30 billion to the UK capital each year by the year 2030, supporting as much as 790,000 jobs.
London is always been one of the top city destinations in the world, attracting near to 18.4 million international visitors alone last year. The extensive transport systems, and now the introduction of the “Night Tube”, along with the weaker pound, is expected to tempt even more overseas tourists to visit Britain over the coming months and years, and of course, this will be very beneficial for businesses such as cinemas, hotels, pubs and restaurants.
Consumer confidence, and any future retail sales data might come under some sterner pressure in 2017 when the UK’s decision to invoke article 50 becomes a reality, and UK firms begin to evaluate their current employment levels. Equally, the probability of higher inflation levels might begin to erode domestic consumers spending power and eventually affect confidence levels.
“Is expected that between now and Christmas, the UK consumer, and perhaps more importantly, the overseas tourist, will continue on their spending spree”
However, it is expected that between now and Christmas, the UK consumer, and perhaps more importantly, the overseas tourist, will continue on their spending spree given that the Governor of the Bank of England, Mark Carney, has already cut interest rates once, and is threatening to do so again. This will clearly have a further impact on sterling, and mortgage rates, giving consumers, and tourists, a bigger spending boost and bang for their buck.
And so as we enter the final few weeks of the summer months, and with August having relatively behaved itself, what is in store for us as investors over the remaining months of the year? Over the immediate few days we have Janet Yellens speech at Jackson Hole on the 26th August, which could have some ramifications for the markets, dependent on her wording and body language in respect to the Feds stance on monetary tightening. Also on the 2nd September we will have the August US non-farm payroll figures which could also determine whether the Fed make their move before, or indeed, after the US presidential election in November .
“The Bank of Japan has indicated that they will not rule out cutting their interest rates again”
Then following that we have the G20 and ECB meeting on the 4th and 8th of September, followed by the Bank of Japan and FOMC meetings on the 21st September. Arguably, there is now a distinct possibility that the leading government officials, and central bankers around the world, will do very little in respect to changing their political or monetary stances, certainly over the short-term. But of course, the aggressive central bank bond buying programmes in the Eurozone and UK will continue which is likely to suppress sovereign bond yields further, and in some cases, push them deeper into negative territory. Similarly, the Bank of Japan has indicated that they will not rule out cutting their interest rates again, sending them further into negative interest rate territory.
As for the global equity markets, they are likely to remain buoyant, helped once again by continued loose monetary policies by the leading central banks. Arguably, we are likely to experience a pick-up in volatility as markets test new highs, and valuations in markets become more overextended, but with so much money still on the sidelines, and bonds looking unattractive from a valuation and yield perspective, the likelihood is that global investors will continue to chase both growth and income by means of equity investing.
Amazingly, the markets continue to be captivated by the central banks whilst investors appear to be sitting on complacency, which is astonishing given a backdrop of falling corporate profits, Brexit, the Chinese economic slowdown, and concerns over the Eurozone, which would appear to give the markets very little wriggle room for any disappointment. However, in the meantime, it is difficult to fight the trend, given that global equities yield more than government bonds, and cash, and that investment capital needs to deliver a meaningful return. This in turn, has meant that investors have been prepared to “climb a wall of worry”, and are likely to continue with this strategy, until the central banks begin to their change course, and try to carefully deflate the current equity and bond bubbles that have been created over the past few years.
Peter Lowman Chief Investment Officer
Peter Lowman has been in investment management for over forty years and prior to becoming Chief Investment Officer for Investment Quorum, he worked within a larger asset managers, primarily as an Investment Director with Cazenove’s. He is responsible for the overall investment strategy for Investment Quorum clients and sits on the Investment Quorum Committee.
This article does not constitute specific advice and investors should bear in mind capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority .