Head of Fixed Interest Research
Market Overview, Alan McIntosh
Equity markets were mixed last week, with the US performing well, but UK and Continental Europe flat. Political events rumble on, Trump’s antagonistic style being applied to trade discussions, while closer to home, the Brexit impasse continues. Ructions in the Italian bond market also rekindled memories of the various euro crises of recent years. Central banks are tightening monetary policy, as is the case of the US Federal Reserve, or contemplating doing so, as with the European Central Bank. We will learn more this week of the intentions of both. Equity markets, however, are largely unphased by these events.
So why do share markets remain generally sanguine? The global growth picture is still positive, albeit with a little evidence of slowing in Europe. However, the US continues to deliver a good set of economic numbers, helped by the tax cut programme. Inflation remains fairly benign and this is keeping the lid on bond yields which seem to have stabilised (outside of Italy that is) since the February market sell-off. Meanwhile, company results have continued to please. Apart from in the US, equity market yields still exceed government bond yields and this seems likely to prevail for some time. Also, some of the (arguably) excess optimism seen in equities, which built up towards the end of 2017 and into the start of this year, has dissipated. The 10% fall in share prices in February also came at a time when companies were reporting strong profits and earnings growth. This combination has left valuations looking a bit more reasonable. Throw in a lot of corporate activity to the mix and it looks like equity markets can continue to make further progress as the year goes on.
Economic Overview, Richard Carter
Usually G7 summits are dull affairs and end in some meaningless and bland statement before being quickly forgotten, so at least this one was different. To be fair, the disputes between supposed allies could be seen as President Trump playing to his domestic audience rather than anything more substantive, but it hardly bodes well for future trade talks. Hopefully the summit in Singapore with Kim Jong-Un will be more successful.
Elsewhere, there are a number of key events taking place this week on the political and economic front. In the UK, the votes on the Brexit amendments will be very closely watched by investors as it could potentially be very damaging to Theresa May. However, it looks increasingly like she will squeak through relatively unscathed as Labour are also divided and the pro-EU Tory rebels seem inclined to support her rather than risk a more right-wing alternative.
Turning to the economy, the Fed is also expected to raise interest rates to 2% on Wednesday as inflation continues to pick up. The ECB is also likely to discuss the endgame for QE at their meeting this week although we may have to wait until July for an announcement on what they decide. On the data front, UK and US inflation numbers are due for release.