Capital Markets Update: July 2017

For professional advisers only. Not to be relied upon by retail investors.

Capital Markets Update

  • Central banks hint at interest rate rises
  • Scale and timing of US tax reform remains unclear
  • GDP growth slowdown dents UK consumer confidence
  • Political uncertainties unsettle markets

In a nutshell

There was plenty of information in July for investors to absorb, mostly in the context of potential shifts to both monetary and fiscal policy in developed countries. Central banks have kept interest rates unchanged but are softening their language a little in an attempt to placate markets. US President Donald Trump faced difficulties delivering on his promise to scrap the Affordable Care Act (ACA). Conflicting interpretations within the Conservative Party of what Brexit means, along with growing wariness about hitherto confident political leadership in France and Japan, added to investor uncertainty.

Fed keeps options open

The US Federal Reserve’s (Fed) July statement revealed that plans to reduce its current bond holdings might begin “relatively soon”. With inflation weak, it makes sense for the Fed to keep its options open, reverting to making decisions based on available data rather than doggedly pursuing a planned schedule of rate rises. It is possible we’ll see future rate increases delayed until inflation starts to hit the Fed’s 2% target.

Europe braces for possible interest rate rise

Mario Draghi, President of the European Central Bank (ECB), appeared to backtrack in light of the market response to his positive take on the eurozone economy in June. His softer tone called for patience while affirming an intent to maintain the ECB’s current policy. But hints that further discussions would take place later in the year prompted the euro to move higher against a basket of different currencies in anticipation of a potential shift in policy direction.

Market expectations falter on Trump frustrations

President Trump has struggled in his attempts to repeal and replace the Affordable Care Act. The key consequence is a delay to the proposed tax reform bill, which is arguably the main focus for markets at the moment. It will probably be 2018 now before any reform bill is passed. It seems investors are taking a rather negative view on the prospects for success.  The company results reporting season in the US is underway and got off to a good start. This should support US equities for a while longer.

UK consumer confidence dented

Key members of Prime Minister Theresa May’s cabinet have been voicing conflicting interpretations of Brexit in the media, despite her attempt to keep everyone in line and on message. Meanwhile, the UK economy is slowing with GDP growth down on the previous year for the first two quarters of 2017, and consumer confidence falling. With a weakened currency at the moment, price rises are likely to hit consumers’ pockets and this is likely to weigh further on overall economic progress. 

Macron loses his lustre, while Abe’s ability questioned

French President Emmanuel Macron’s approval ratings took a knock this month. A row over military spending hurt most and resulted in the resignation of an armed forces chief. Further criticism arose over planned tax cuts and reductions in housing benefit. Macron’s new political party is inexperienced and it is too early to tell whether that is going to prove a problem, or how markets may react to his reform agenda. Japanese Prime Minister Shinzo Abe was another world leader whose approval rating fell. This cast a serious doubt on the prospects for ‘Abenomics’, a comprehensive reform programme that looked like it was having a positive effect. As we head into an election year in 2018, further measures to stimulate the economy by the Bank of Japan may be on the cards, along with further reform from the government.

Greek bonds find favour

Greece returned to the bond markets by issuing an oversubscribed five-year bond paying 4.6% that raised €3 billion. The money will be used to service the country’s debts. This was a big step forward for the Greek economy, given the country’s recent history of failing to repay its main creditors.


Uncertainty prevails and that warrants a continued element of caution. Market volatility remains at record lows and the question is whether this is the calm before the storm, or the new normal. Low volumes of trading are usual in August, but this can skew market volatility somewhat with limited investment activity having a disproportionate effect on overall market movements. Our portfolios remain light on equities, particularly UK equities. We also retain our cautious view of bond markets, where we are seeking to limit the effect of a period of rising interest rates on our portfolios. Our positions on both equities and bonds have gone against us recently, but we continue to believe it is a prudent approach in light of the market uncertainty.

Oliver Wallin, Octopus Investments


t: +44 (0)20 7776 3153

Important information:

For professional advisers only. Not to be relied upon by retail investors. The value of an investment, and any income from it, can fall or rise. Investors may not get back the full amount they invest. Past performance is not a reliable indicator of future results. Personal opinions may change and should not be seen as advice or a recommendation. Issued by Octopus Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 33 Holborn, London, EC1N 2HT. Registered in England and Wales No. 03942880. Issued: August 2017.