London, May 2017
Political agendas continue to dominate markets
Whether it is Trump continuing to create waves across the board, snap elections in the UK or general elections over Europe, markets remain wary of what might be around the corner.
As our Prime Minister seeks to set her own mandate through a snap election in June it will be interesting to ascertain how her new manifesto will be received by the voting populous and markets alike. After the announcement sterling rebounded on the prospect of a stronger parliamentary majority for May’s Conservative party. Needless to say the tasks ahead for Theresa May domestically and with regards to Brexit are enormous and complex but will her hand be strengthened by a General Election victory?
The International Monetary Fund (IMF) has upgraded the UK’s economic forecast for the second time in a row as the strength of consumer spending continues to feed into stronger growth. The UK economy will expand by 2% this year the IMF predicted in its World Economic Outlook and said “Growth remained solid in the United Kingdom, where spending proved resilient in the aftermath of the June 2016 referendum in favour of leaving the European Union.” With regards to the UK’s decision to leave the EU the IMF highlighted that negotiations over the future relationship would not do significant harm to trade, although it did say uncertainty may weigh on activity and harm the medium-term growth prospects of the British economy.
Having said that Inflation increased to an annual rate of 2.3% in March which is the fastest rate since 2013 and has resulted in dragging confidence lower; consumer confidence fell in the first quarter to its lowest level in more than two years. Further figures showed the sharpest fall in retail sales in seven years and the fastest price rise in five years so no doubt markets will be monitoring economic data releases with keen interest to see how the economy progresses.
According to a report written by the credit rating agency Fitch in February the Trump administration represents a risk to the international economy and global government creditworthiness. The rather scathing report argued that the predictability of the US had eroded, highlighting the “aggressive tone” of the administration and raising the possibility of “sudden unanticipated changes in US policies” that could have negative global implications. “The primary risks to sovereign credits include the possibility of disruptive changes to trade relations, diminished international capital flows, limits on migration that affect remittances and confrontational exchanges between policymakers that contribute to heightened or prolonged currency and other financial market volatility,” the report said. Such a forceful tone bucks the trend for rating agencies that tend to take a careful approach on politics.
In March the US Federal Reserve signalled the end of an era of ultra-low interest rates when it raised the federal funds rate by a quarter point to a range of between 0.75% and 1% however pressure on the US Federal Reserve for a further interest rate rise in June has eased after the first fall in core inflation for seven years and a second successive monthly drop in retail sales. Whilst the market had been anticipating a rate rise in June followed by one more this year looking at Bloomberg’s published World Interest Rate Probability (WIRP) the likelihood of a rate rise in June is currently 66% but moves to over 80% for the latter part of the year.
The Eurozone has returned to a trade surplus in February after falling to a deficit the previous month as an increase in exports from Germany tipped the balance of trade. The trade surplus increased 8% year on year. The US was the largest trading partner with exports more than double those to China (the next biggest destination). Subsequently Britain was pushed behind the European Union in the queue to strike a free trade deal with America according to Washington officials.
You could be forgiven for not noticing that in February we had the Eurozone’s 60th anniversary which went by without much attention. Europe has already stepped past a series of political obstacles recently from the Italian constitutional referendum to elections in the Netherlands and Austria. Now, after a year of Eurozone political risk events only the final round of the French Presidential elections on the 7th May and German elections in September remain. If the elections go off without a hitch it could prove a spur for markets to start seeing the recovery story more clearly.
The European Central Banks governor Mario Draghi has said that the risks to Eurozone growth have become more ‘balanced’ as the central bank decided to keep rates on hold at 0% in March.
The FTSE 100 is little changed since its rise in the first two weeks of January, after last year’s surge induced by the lower pound. The FTSE 250 however is up 8% since the start of the year having underperformed the blue chip index in 2016 because of concerns over the UK economy post -Brexit. A relief rally in March following France’s presidential election saw the CAC have the best trading day since 2012 with both the DAX and FTSE20 hitting record highs. The Dow Jones also reached an all-time high of 21,115.55 in March 2017, can such levels be maintained?
Global oil discoveries dived to a record low in 2016 as companies continued to slash spending and the cuts are expected to keep coming this year. Oils discoveries dropped to 2.4bn barrels in 2016 compared with an average of 9bn barrels per year over the past 15 years according to a report published in March by the International Energy Agency (IEA). Meanwhile the volume of conventional oil projects sanctioned was at the lowest level in more than 70 years. The slowdown is due to a decline in investment spending driven by lower oil prices.
China’s economy grew faster than expected in the first quarter of 2017 as higher government infrastructure spending and a gravity-defying property boom helped boost industrial output growth to 6.9%, the highest rate for over two years and what is more, retail sales and exports would suggest that the economy may continue this momentum into spring. Most analysts however are suggesting that the first quarter may be as good as it gets for China given concerns that Beijing is still relying too heavily on stimulus and ‘old economy’ growth drivers, primarily the steel industry and a property market that is arguably overheating. Nonetheless this is a strong start for China which may see Beijing, once again, meet its annual growth target even if activity starts to fade later in the year.
Should you wish to discuss this article or any of your Treasury requirements, the Bank Leumi (UK) plc Treasury and Global Markets team are on hand to assist. We look forward to hearing from you.
Sarah Ryman (Chartered MCSI), Treasury dealer
Treasury and Global Markets
+44 (0) 20 3772 1623/24
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