Chief Investment Strategist
Friday’s “Brexit breakthrough” had an interesting impact on the UK stock market. Initially the pound rose in value, hitting the prices of UK-listed overseas earners. However, later in the day, the pound succumbed to profit taking and the FTSE powered ahead to close up by 1%. There is much confusion over what the breakthrough actually means, but if it gets us to the next stage of negotiation, then all to the good. The strong US employment numbers, and suggestions that the Republicans were getting close to agreeing a package of tax cuts, also helped push the US stock market to a fresh all-time high. This week’s universally expected interest rate rise in the US is already factored into stock prices, so barring some unanticipated event; it seems likely that markets will continue their good run into year end.
Looking forward to next year, the outlook for equities remains positive. Inflation and interest rates are expected to remain low by historic standards. The global economy is enjoying a relatively rare period of synchronous growth (despite the UK slowing) and the corporate sector is benefiting accordingly, hence the positive sentiment toward stocks. With little on the horizon to dramatically change this dynamic, there is every expectation that stock markets should be able to make further progress in 2018. The one caveat is that equities don’t rise in a straight line forever and at some point in the near future, share prices may suffer a minor correction as some investors lock in profits. Such events are normal, although we haven’t experienced one for some time. The best advice is to remain invested, as always, for the longer term.
The UK and the EU finally agreed a deal last week to allow Brexit talks to move on to trade and the future relationship. However, it was very obvious that the deal itself was a fudge and did not really resolve any of the more difficult issues, including the Irish border. There is also a shaky truce in the Cabinet between those who want a clean break with the EU and those who are happy with some sort of close alignment, and it is not clear whether this truce will hold if trade talks run into trouble. So the uncertainty will continue to affect UK markets, but at least the narrative will change somewhat once ‘sufficient progress’ has been decreed at this week’s EU summit.
Elsewhere, the main economic release last week was US nonfarm payrolls. Once again, job creation was very strong but wage growth remained fairly well contained at only 2.5%. One of the big risks for bond markets next year is higher wage growth pushing up inflation and leading to a faster pace of rate hikes but it has so far failed to materialise despite a very low rate of unemployment.
Looking ahead this week, the Fed is almost certain to raise interest rates on Wednesday despite those wage numbers. The ECB and Bank of England also meet, while inflation numbers will be released in the UK and US. CPI is expected to remain at around 3% in the UK but is likely to begin tailing off in the coming months.
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