Head of Fixed Interest Research
Market Overview, Alan McIntosh
Last week was a strong one for global equity markets despite the ratcheting up of geo-political tensions, especially with Iran. As mentioned many times before, however, markets find it difficult to price-in political events until there is a certain outcome. The most obvious effect of the US pulling out of the nuclear agreement has been a rise in the oil price, reflecting the likelihood of embargoes on the sale of Iranian oil. Beyond that, it is very difficult to second-guess where this change in policy takes us. President Trump’s style tends to set out a pretty extreme initial negotiating position, only to relax it a little as the process continues. We are beginning to see this with the ongoing trade spat with China. Unfortunately, events that once would have been discussed behind closed doors are now being aired on social media, making it difficult to distinguish posturing from hard facts!
The US results season for Q1 is all but over, with average earnings growth of 25% delivered. This is the first period reflecting the boost from last year’s tax cuts, but the numbers themselves have exceeded the expectations of analysts. All eyes of course will be on the next three month reporting cycle to see whether this can continue, accentuating the unhelpful obsession with short-term numbers. This is an unfortunate trend which seems to be getting worse and potentially encourages negative behaviour from company managements.
More deal activity in the UK equity market last week. Bids for Zoopla and IWG (formally Regus) have emerged from US private equity firms, long of funds but now, it seems, no longer short of ideas. The galling thing is how the share prices of the targets seem to move ahead of such disclosures. Another unwelcome trend that seems to be getting worse.
Economic Overview, Richard Carter
The Bank of England decided against raising interest rates last week following the run of weak economic data that we have had in the UK. They also downgraded their growth and inflation forecasts for the remainder of 2018. A rate hike this year is still possible but it probably requires an end to the damaging uncertainty being caused by Cabinet divisions over the Customs Union.
Elsewhere, it was a busy week on the geopolitical front with Trump pulling out of the Iran nuclear deal, but trade tensions with China continue to ease. Markets are also watching coalition discussions in Italy which seem likely to result in a populist government made up of the League and the Five Star movement. So far, this development has yet to cause much of a ripple in Italian asset prices and this can partly be explained by the ongoing purchases of Italian debt by the ECB under their QE program. However, some of potential policies of the new government give grounds for concern over the longer-term.
This week, the main data out is US retail sales and UK unemployment figures.
Investors should remember that the value of investments, and the income from them, can go down as well as up. Investors may not recover what they invest. Past performance is no guarantee of future results.
Any mention of a specific security should not be interpreted as a solicitation to buy or sell a specific security.