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Weekly comment: 23.04.2018

Market Overview, Alan McIntosh

Major stock markets enjoyed a positive move last week as some of the heat came out of the tariff tensions between the US and others. At present this seems to be more of a phony war, but with more accommodating language from the Chinese, the risk of a full-blown trade war seems to be receding for now. Resource stocks and industrials led the risers as risk appetite returned to the table. The first impact from the US tax cuts introduced at the end of 2017 is being reflected in the company results season now underway. So far so good. Results have generally surpassed upwardly revised expectations. This week sees the majority of companies reporting their Q1 figures, so we will have a much better idea of how things are faring by this time next week.

Shire, the FTSE 100 listed pharmaceuticals company, saw its share price move higher again after announcing that it had received three informal takeover approaches at ever higher prices from Takeda, its Japanese peer. Shire has rejected all three, but late on Friday, Takeda responded with an even higher indication of £47 per share. Shire has yet to respond to this new offer and Takeda has until April 25th to formalise its offer. There is still the possibility of another party becoming involved, although Allergan, having initially ruled itself in after the Shire announcement, subsequently declined to pursue this opportunity.

Economic Overview, Richard Carter

The main development for UK investors last week was another bout of flip-flopping on interest rates from the Bank of England. Markets had thought that a May rate rise was a done deal but Governor Carney is now ‘conscious there are other meetings in the year’ following a bout of weak data, while his MPC colleague Michael Saunders sounded keen to go ahead anyway. The net outcome was that a rate hike is now back to 50% priced in for May 10; and Sterling fell as a result.

Global bond markets had a bad week despite Carney’s dovish comments with 10 year US Treasury yields seemingly on the brink of breaching the 3% level. The move has been driven by the recent rise in the oil price which has pushed up inflation expectations in the US to 3.5 year highs. A breach of the 3% level may generate some short-term selling and lots of headlines but ultimately should be seen as another step along the way to a less distorted bond market. Furthermore, ongoing QE from the Japanese and European Central Banks is likely to prevent any major rise in yields.

There was good news on the data front this morning with a modest rebound in Eurozone PMIs. These had fallen sharply during Q1 and caused concern that the Eurozone economy had stalled. However, the service sector in France and Germany picked up while the German manufacturing PMI was better than expected at 58.1, so the loss of momentum doesn’t look to be too severe. There also continues to be better sentiment on the trade front with the US and China apparently keen to settle their differences through negotiation rather than putting up barriers.

This week, the main event will be the ECB meeting on Thursday as well as UK and US GDP releases on Friday. Brexit is also back in the headlines ahead of parliamentary votes on the Customs Union, and this may add to the pressure on Sterling following Carney’s briefing.

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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