Market Update July 2018
Posted: 20th July 2018 | Share
"Fish and visitors stink in 3 days."
Donald Trump warned Theresa May that a soft Brexit would “kill” the chance of a deal with the US on the first day of his four day visit to the UK in July. He subsequently backtracked ahead of his tea with The Queen saying that ties between the two countries were at the “highest level of special” and that she (Mrs May) was doing a “fantastic job”.
In the UK Theresa May seems to have had a challenging month accommodating visitors from abroad whilst facing domestic political dissent, which have resulted in resignations from her cabinet. Ultimately, however, progress is being made – albeit painfully. She managed to achieve approval from the Government of her White Paper detailing the UK’s new relationship with the EU, which opts for a post Brexit “association agreement” between the EU and UK. This includes a free trade area for goods, a looser arrangement for financial services, a security partnership and continued membership of several EU agencies. “Let’s just keep our eyes on the prize here,” Mrs May highlighted. “The prize is delivering leaving the EU in a way that’s in our national interests”.
Markets eagerly await a rate move for the UK: recording – in mid-July – an 89% probability of a hike on 2nd August. Yet this soon moved lower following static inflation and poor retail sales figures. Average weekly earnings have been slower to pick up than forecasted and a “no deal” Brexit would be a “material event” for interest rates according to Mr Carney. Meanwhile, UK unemployment has remained at a four-decade low of 4.2%. With inflation remaining steady at 2.4% in June, below market expectations, this raises questions over whether the Bank of England will actually follow through with a rate rise at its August meeting. One could argue that the economy isn’t quite ready for higher interest rates, as the low unemployment has not led to rising domestic inflation (yet) and risks of a “disorderly” Brexit weigh on sentiment.
The International Monetary Fund (IMF) has warned US President Donald Trump that a global trade war, if allowed to escalate, could knock 0.5% off growth projections by 2020; equivalent to around US$440bn in lost growth worldwide per year. The IMF blamed “non-inclusive growth and structural transformation” for the “political malaise” represented by the rising tide of protectionism. The market was starting to anticipate only one more rate hike during 2018, however, after US Federal Reserve Chairman Jerome Powell’s comments about “several years” of strong jobs market in the US lifted optimism. He remarked that the “best way forward” is to keep gradually raising rates – allowing inflation to stay near the Fed’s 2% target. Analysts took this to be the strongest indication yet that the Fed is within reach of its dual policy targets, meaning a third of the anticipated four hikes during 2018 could materialise in September.
While economic data out of Europe seems to have weakened over the month, the European Union signed its biggest ever trade deal with Japan: highlighting to peers the benefits of removing trade barriers. The agreement may have been five years in the making but is no mean feat given that it covers a third of the world’s GDP, as well as 600 million people and 28 EU member states, and aims to increase trade and investment in the two markets while reducing prices for consumers. With regards to interest rates, it is broadly anticipated that the European Central Bank will commence tapering this year – but rate hikes are still some way off, with signs of a move not expected until mid to late 2019.
Gold continues to battle with this year’s downtrend and had held the December 2017 support level (around 1240) a number of times this month but then broke lower. With US Treasury yields hitting a near-decade high and market seemingly shrugging off political risk, for now, we are yet to see gold prices pick up.
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