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Weekly comment: 08.07.2019

Market Update, Alan McIntosh

Bolstered by optimism surrounding the renewed trade talks between the US and China, global stock markets started the second half of the year on a firm note. There is also an expectation that the US central bank, the Federal Reserve, will cut interest rates at its next meeting later this month, which is also helping sentiment. However, stronger than anticipated labour market data announced on Friday suggests that the market may be getting a little ahead of itself in looking for a half percent reduction in borrowing costs so soon. The US economy grew by over 3% annually in the first quarter of the year and unemployment is currently at a 50 year low. This hardly implies that a significant easing of monetary policy is warranted. Nevertheless global economic activity, particularly in the manufacturing sphere, is slowing, and inflation, the one metric that central banks are charged with targeting, is softening. This may prompt some easing in due course.

In the UK, the outcome of the Conservative leader election (by party members) will likely be announced on 23rd July. The odds look to favour Boris Johnson. Markets are still no closer to figuring out “where next” with Brexit but clearly the clock is running down and various scenarios are still possible: leave with/without a deal on 31st October; apply for further (temporary) extension because of a second referendum or general election; or wake up and find out that Bobby Ewing is still alive (it was all a bad dream!)

Finally, all change in Europe, with a new President of the European Central Bank (Christine Lagarde), a new President of the European Commission (Ursula von der Leyen), a new Leader of the European Council (Charles Michel) and a new Prime Minister of Greece (Kyriakos Mitsotakis). Boris Johnson, with his well-known mastery of fine detail, will have his work cut out.

Economic Update, Duncan Gwyther 

This week US Fed Chair Powell will give his half-yearly speech to Congress against a background of a strong labour market where employment and wages are rising, albeit at a reducing pace. Real GDP may be slowing but market measures of inflation have reduced and financial conditions remain supportive.

As a precursor to the speech last week’s Monetary Policy noted that asset valuations remain elevated and the Fed will act as appropriate, which suggests the FOMC may cut rates by 25bp rather than the 50bp that markets – and the President – had been hoping for. Bond yields backed-up marginally late last week but remain very low.

Further clues on ECB quantitative easing may be revealed when minutes from the last meeting are published on Thursday, although it is not clear how this action will benefit German manufacturing which is facing recession-like conditions from the slowdown in global trade. Japan is also suffering in this respect with a sharp downturn in machinery orders just reported. While we recognise the economic data is softening, the key to the global economic outlook remains the resolution, or at least non-escalation, of trade tensions.

Investors should remember that the value of investments, and the income from them, can go down as well as up. You may not recover what you invest. This commentary has been produced for information purposes only and isn’t intended to constitute financial advice; investments referred to may not be suitable for all recipients. Any mention of a specific security should not be interpreted as a solicitation to buy or sell a specific security.

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