Market Commentary February 2019
Uncertainty prevailing ahead of Brexit deadline...
The Bank of England (as expected) left rates unchanged this month but did slash UK growth forecasts from 1.7% - forecast in November - to 1.2%. The bank’s Monetary Policy Committee (MPC) last raised rates in August 2018 to 0.75% and voted unanimously to hold rates citing softer activity abroad and greater effects from Brexit uncertainty. Government borrowing has fallen to its lowest year-to-date level since 2001 and recorded the largest January surplus since records began in 1993.
UK inflation has fallen to a two-year low of 1.8% in January; the Consumer Price Index dropped from 2.1% in December, falling below the Bank of England’s 2% target for the first time since 2017. UK GDP for the end of 2018 was confirmed at 1.3% this month as a result of contracting industrial production and manufacturing. Retail sales on the other hand surprised to the upside with a jump to 4.1% year on year. Needless to say focus remains on Brexit and whether a deal will come to fruition.
Donald Trump seems to have made some progress with Congress regarding support for the border funding deal to avoid another government shutdown and commented on Twitter that the bill would allow him to get “almost $23 BILLION for Border security”. He suggested that he no longer needed money specifically allocated for the wall and subsequently announced a National Emergency to bolster funds. He also stated this month that his leadership has promoted a strong economy as he is committed to rebuilding the country’s crumbling infrastructure. However he offered little detail as to how he would achieve his economic agenda.
Minutes published from the Federal Reserve’s last meeting affirmed for investors that the US central bank plans to be patient with respect to further rate hikes and implied probability of a hike this year is now less than 4%. Policymakers signalled the central bank will complete the job of reducing its multitrillion-dollar balance sheet and agreed that holding rates for a time posed “few risks”. Several officials agreed further increases would only be necessary if inflation accelerated more than they expected.
Tensions between European members were highlighted at the World Economic Forum in Davos at the start of the month. Dutch Prime Minister Mark Rutte said that the bloc was divided from north to south and east to west over action on refuges and the commissions handling of Italy’s 2019 budget, creating a “total lack of trust” between members. France has recalled its ambassador from Italy as relations between the two countries hit a post-war low and the European Commission cut its growth forecast to 1.3% for the year, down from 1.9% forecast in November. Germany is now officially in stagnation having reported growth in Q4 2018 of 0% fuelling fear of recession in one of the strongest economies in Europe.
OIL prices look set to show their best first quarter in eight years after the cartel OPEC cut supply pushing Brent crude to over $66 per barrel which is a three-month peak after a challenging end to 2018.
China’s vice-president has dismissed mounting fears that decades of breath-taking expansion was beginning to falter in the face of a US trade war insisting “sustainable growth” in his country would be maintained. Wang Qishan acknowledged the risks facing Beijing as well as other major economies but insisted that the 6.6% growth in 2018 - while at its lowest level in three decades - focuses on a drive for “quality and efficiency” of growth which he highlighted as more important. The US-China trade deal appears to be getting closer as Trump is willing to extend talks in order to negotiate an agreement.
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