Capital Markets Update
- Central banks give little away about plans to raise interest rates
- Markets expect diplomacy will solve North Korean stand-off
- Taxing times for Trump
- Brexit negotiations test consumer confidence
In a nutshell
August was a frustrating month for investors, with central banks choosing to avoid any direct reference to monetary policy when they met at Jackson Hole. US president Donald Trump ratcheted up his rhetoric against North Korea after its latest missile test. Trump faces an even more a difficult time getting approval for his proposed tax reforms given the failure to pass reforms to healthcare in July. The billion-dollar aid package for flood-stricken Houston also needs to be agreed by Congress and will put additional pressure on the budget. In the UK, sterling remained weak while Brexit negotiations rumbled on and consumer spending continued falling.
Central banks avoid decisions at Jackson Hole
The actions of central banks have been a focus for investors over the past few months, as they have sought to determine when the likely shift in monetary policy will take place. But key issues on debt levels and monetary policy were ignored at the annual gathering of the world’s central bankers at Jackson Hole, Wyoming. Instead, they used the gathering to put forward a counter-argument to the themes of protectionism, anti-globalisation and the de-regulation of financial markets that have emerged of late on both sides of the Atlantic.
Markets expect diplomacy will solve North Korean stand-off
North Korea’s missile testing programme continued to cause alarm. The ‘sabre rattling’ from two unpredictable protagonists, North Korean leader Kim Jong-un and Donald Trump, is certainly troubling. The reaction of many investors was to sell equities and move to relatively safer assets, such as gold. But markets bounced back quickly, with investors seemingly taking the view that the issue can be contained and diplomacy will win out.
Taxing times for Trump
With the US wrestling with the fallout of the Houston floods, Trump has been forced to delay his plans to promote his tax reform. The floods have created concerns for certain stocks and sectors, for example, insurance and oil. Trump has a number of pressing issues to contend with when Congress returns in September from its summer recess, namely healthcare, tax reform and raising the national debt ceiling. Market participants don’t seem to be particularly optimistic about the chances of the current tax reform proposals being passed. But it is a popular policy, particularly among Republicans, so some reform is likely, even if it is diluted. Failure by Congress to agree the national debt ceiling resulted in a shutdown of the US government in 2013 and the budget debate has been taken to the wire every year since then. But given the recent history of budget negotiations, investors don’t appear too concerned as they have seen it all before. It may be a little easier this time, with the Republicans commanding a majority in both houses.
Brexit negotiations test consumer confidence
In the UK, negotiations to leave the European Union (EU) look to be heating up, but not much progress is being made. The UK Government still needs to answer key questions on the Irish border, EU nationals living in the UK and the bill for Brexit. The Government seems to be softening its stance a little, but EU officials indicate that current proposals are unsatisfactory. Consumer and business confidence has been tested while the Government attempts to get its message straight. A weak sterling has not proved to be especially beneficial to exporters and consumers will struggle as prices begin to rise in the shops. The key beneficiaries of a weak sterling are those companies and investors bringing overseas earnings into the UK.
There was little movement in equity markets in August. Most overseas markets generated positive returns in sterling terms, given the weakness of the pound, even though they had fallen in value in their own local currencies. This was a positive for the overseas investments within our portfolios. Overall, we are still cautious given the prevailing geopolitical uncertainties. There are a lot of positives for investors, particularly in the US and Europe, but much of this constructive outlook has already been priced into market prices and certain markets look quite expensive as a result. We remain mildly cautious on the outlook for equities generally, but are not overly defensive. Our portfolios remain light on UK equities, where we see more cause for concern as Brexit negotiations continue. We still maintain a preference for corporate bonds over government bonds.
Markets will be keeping an eye on comments on the euro by the European Central Bank (ECB) President Mario Draghi when the ECB meets in September. Silence on this matter is likely to mean that monetary policy in the eurozone will remain loose for a while longer. The German elections are due at the end of September, and Chancellor Angela Merkel is comfortably ahead in the polls of her nearest rival, Martin Schulz. It is hard not to be complacent, but it appears that Merkel is cruising into another term. That would be a positive from a market perspective. Some consistency on the political stage in Europe would be welcome, especially given Emmanuel Macron’s honeymoon period as French President appears to be coming to a close with a slide in his popularity. China’s planned Communist Party congress in October will be important for outlining its plans and policy.
Oliver Wallin, Octopus Investments
t: +44 (0)20 7776 3153
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