Investments

Market round-up 22 - 26 July 2019

Arjun Pandya

With the UK basking in record temperatures this week as the mercury reached 39⁰C on Thursday, the heat was really on in Westminster. Tuesday of course saw the much-fancied Boris Johnson step through the doors of Number 10 to become the 55th Prime Minister of the United Kingdom.

 

Boris Johnson, the new Prime Minster

Reiterating his intentions to take the UK out of the EU by the deadline of 31st October in his first speech as Prime Minister, Mr Johnson was quick to bring an element of optimism to proceedings; “I have every confidence, in 99 days’ time we will have cracked it.” While there was little reaction in financial markets during the announcement of his victory, sterling did push back up to $1.25 as investors became cautiously optimistic when his new cabinet was announced. UK mid-caps also rose throughout the week, accelerating on Wednesday as it was announced that Sajid Javid would become the next Chancellor of the Exchequer. Famously having had a picture of Margaret Thatcher in his office, the former banker was many commentators’ pick for the position. Mr Javid has already spoken of creating a £100 billion infrastructure fund and investing heavily in housebuilding, sentiments that drove stocks in each sector higher by the end of the week.

Things were also hotting up in the oil markets as the beginning of the week saw heightened tensions in the Middle East boost blue chip oil producers as prices of ‘black gold’ rose. Reports of Iran’s seizure of a British tanker last week may lead to supply disruptions. These potential supply issues boosted both Shell and BP to enjoy gains of over 1%, keeping the FTSE 100 above water.

Economic data

Across the pond, it seems that the first US interest rate cut in a decade won’t be put on ice, as Reuters news agency reported that a poll of economists agreed it was almost a done deal. US Federal Reserve officials have been keen to strike a dovish tone over recent months, with many economists now pricing in a 0.25% rate cut next week and a further cut later in the year. The damaging effect of an ongoing trade war with China has led many to believe that the central bank has now been left with little choice.

Pared with some strong earnings from Coca-Cola and United Technologies Corp, a reignition of trade talks also gave US markets some cheer. News of potential progress in US-China trade negotiations broke when US officials were headed for Beijing for more face-to-face talks this week, a sign that both sides are showing willing at least to come to an arrangement.

On the economic data front, US economic growth only slightly exceeded economists’ expectations, at 2.1% QoQ vs forecasts of 1.8% – driven by solid consumer and government spending. It was the slowest pace of growth since March 2017, marking a notable drop from 3.1% in the first quarter of the year.

Week ahead

Japans central bank

After one of the hottest, sunniest days of the week on record here in the UK, it is only fitting that during the beginning of next week commentators turn their gaze to the land of the rising sun. With 77% of economists polled by Bloomberg now expecting that Japan’s central bank will move to introduce further easing, the far east could well set the tone for the coming week.

Moves to ease policy in Japan follow a wave of other central banks potentially looking at how to spur on inflation amid heightened uncertainty over the health of the global economy. At a G7 summit last week, finance ministers said they don’t expect the situation to pick up until next year, while the IMF on Tuesday trimmed its growth forecasts for this year and next.

The theme of central banks looking to stimulate their respective economies continues into the week. Wednesday will see perhaps the most important of them all as the US Federal Reserve address the media. In its primary way to communicate its views with investors, the central bank will discuss its minutes from its last policy meeting, detailing opinions on the overall economy as well as offering clues as to what future rate policy will be. Upping the ante, Fed Futures, the primary tool when assessing future rate policy, shows a c.95% chance that the Fed will cut rates by 0.25% and so the statement should make for fascinating listening.

US Employment numbers

The Fed’s announcement comes just days before Friday’s US Employment numbers, in the form of Non-Farm Payrolls – often the piece of data the central bank relies on the most when formulating what to do with rates. Employment data is important as it affects nearly all facets of an economy, if employment levels are high, in theory, workers should enjoy higher levels of remuneration and spend accordingly as they feel safe in their job. This in turn improves corporate profits and so the pattern continues until the economy starts to overheat. The quandary the Fed faces is that although the labour market is tightening, wages and spending have ultimately failed to increase accordingly.

On domestic shores, our very own central bank will announce its equivalent data, focusing on inflation and the economic outlook for the UK. With a new PM and a supposed new Brexit plan in place, combined with an outspoken Governor of the Bank of England when it comes to leaving the Bloc, Thursday could well have a heightened impact on sterling as Mark Carney will undoubtedly give his views.

The information in this blog should not be regarded as financial advice. If you are unsure of any of the terminology used you should seek financial advice. Remember that the value of investments can go down as well as up, and could be worth less than what was paid in. The information is based on our understanding in July 2019.