Market Views July 2018

market viewsIn this our latest market views for July 2018, we consider the first half of 2018 and review what we think has been and might influence world stock markets.

Overview

After very low volatility in stock markets during 2017, this was reversed at the end of January. Near 10% falls in many stock markets albeit followed by rapid recoveries.

There have been new highs in the US and UK stock markets since, but markets have remained more volatile. This has been fuelled by speculation as to the impact of (small) rises in interest rates. Also, the possibility of a trade war between the US and China, which might also spread further to the EU. President Trump is flexing his muscles with China. He is also directing his criticism over unequal trade practices to the EU, Canada and Japan.

The US has had a significant trade deficit with China for a very long time now. The harsh reality is that China is a very significant banker to the US. It holds $1.2 trillion, or 19% of the foreign ownership of US Treasuries, according to thebalance.com as of March 2018. This is likely eventually to temper the current US approach. The message ‘all parties lose in trade wars’ is likely to result in a moderation to proposed increases in tariffs.

Pressures in Europe have grown with the establishment of a Eurosceptic Italian coalition government. The new Italian government is committed to stay in the Euro testing the strength of the Euro mechanism. They want to significantly increase government spending – and by far more than the limits prescribed under the euro mechanism.

Economic migration from Africa and the Middle East is also likely to test EU harmony in the coming months. Many Eastern European members have refused to take ‘their share’ of migrants. Similar pressures are also building in Germany which may result in Chancellor Merkel’s coalition government fragmenting.

The UK FTSE100 index was down 0.66% for the half year, the US S&P 500 was up 1.67%.

The United Kingdom

Growth in the UK economy is muted currently. It’s in limbo due to uncertainty over the future of Brexit and what the UK will be able to negotiate. A comparatively soft exit is likely to see a considerable rebound in economic activity. If it can be negotiated and gets through parliament and the cabinet. But realisation is dawning that no deal or a very hard exit may have long-term impacts on the U.K. Take the recent  threats/comments made by Airbus, BMW, and Siemens for example.

The Bank of England has talked of a marginal interest rate rise of 0.25%, perhaps in August of this year. This seems unlikely given the current economic uncertainty. In addition to manufacturing industry uncertainties, the high Street retail sector continues to suffer from online shopping with many of the traditional department stores (John Lewis, House of Fraser, Debenhams and Marks & Spencer) suffering. These retailers are online, and are also beefing up their online offerings. But they’ve got huge areas of retail space and large numbers of staff putting them at a disadvantage.

The United States

Economic growth continues apace in the US. Unemployment continues to decline, although much of the new employment is relatively insecure and low wage in nature. Interest rates have risen to a target range of 1.75% to 2%. There’s a further possible 0.5% rise, by way of two further 0.25% increments over the rest of the year.

If growth falters, interest rates are likely to stay where they are.

Europe

The European Central bank (ECB) has indicated that its ongoing financial stimulus package will be scaled back in September.  Then ended at the end of this year. (This involves purchasing €30 billion per month of European Government and Corporate bonds). It has also indicated that interest rates will remain at their very low levels of 0.25% for deposits until September 2019.

A Eurosceptic Italian government, possible changes in Spain following the vote of no-confidence in the existing Prime Minister Mariano Rajoy, and more hard-line eastern European governments in Poland, Hungary, and Austria may contribute to increasing tensions in the EU zone in the coming months.

Japan, China & the Far East

Economic growth in China continues to moderate but according the government figures, the Chinese GDP continues to grow at 5 to 6% per annum. That’s at least double the rate seen in the US currently.

The Chinese authorities are in the process of making the economy more self-sustaining and fuelled by domestic consumer expenditure. But the country remains vulnerable to US imposed trade tariffs. The US and China have a symbiotic relationship in terms of China helping to bankroll US government spending. In turn it’s benefiting from the US consumer buying their more competitive goods.

In Japan, the government has kept its monetary stimulation policy unchanged, with -0.1% interest rates. The growth in exports may slow given President Trump’s current policy and inflation is predicted to fall from 1% to 0.5%. This would still be high by Japanese standards where deflation has been the prevailing trend for the last decade and behind the government stimulation package.

Summary

Markets are likely to remain more volatile for the rest of this year than last year given the belligerent approach to trade currently being taken by President Trump’s administration. It is highly likely however that this approach will moderate (not least by market forces pressuring the administration to do so).

Governments worldwide continue to try to restore interest rates to more normal levels. With Government and Consumer indebtedness in the US and the UK, they’re likely to remain at historic lows for some years. This will no doubt continue to underpin stock markets.

Michael A Carden
2 July 2018

Important – The value of investments can fall as well as rise, so you could get back less than you invest, especially over the short term. Past performance is not a guide to the future and cannot provide a guarantee of the future returns of a fund or a particular stock market. The information shown is not personal advice, if you are unsure about the suitability of an investment for your circumstances please contact us for personal advice or speak to you usual financial adviser.

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