Capital Markets Update: June 2018

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

  • Investors look to ECB and Fed for interest rate intentions
  • US dollar strength undermines emerging markets
  • Trade concerns unsettle markets


In a nutshell

Investors kept a close eye in June on the European Central Bank (ECB) and US Federal Reserve (Fed) for further signs about interest rate increases. Concerns that tariffs might trigger a trade war unsettled markets, while the possibility of a strengthening US dollar put emerging markets on the back foot.

June’s news – ECB placates markets with delay on interest rate rise

Mario Draghi, President of the ECB, pointed to the uncertainty permeating the economic landscape as he softened what is a hawkish stance on quantitative easing (QE). The ECB plans to change tack on QE by no longer buying bonds from December. As a counter to this announcement Draghi focused on interest rates and issued a pretty specific piece of forward guidance, which look set to remain at current levels until at least September 2019. For now at least, the market has interpreted this tapering announcement as a broadly dovish stance from a supportive central bank.

The key test of Draghi’s resolve will most likely emanate from the political situation in Italy. It could become potentially more problematic in September when the new government submits its budget and we will see just how keen the new government is on confrontation with the European Union.

US Fed sticks to its guns on raising interest rates

In the US, the Fed pretty much has to continue on its path of interest rate increases regardless. Back in 2015, the Fed looked beyond its remit and put a hold on its plan to raise interest rates over concerns as to the pace of global growth. It can’t really do that today given the inflationary pressures that are currently building in the US.

The Fed has two objectives – to maintain inflation at or around 2% and unemployment at a low and sustainable level.  At the moment, unemployment is at all-time low levels, which strengthens the case for wage inflation. Higher wages tend to lead to greater levels of consumption, which will be boosted further through the additional tax breaks feeding through from US President Donald Trump’s tax reform. There is potential for the economy to overheat and inflation to build but, for the time being, the stage is set for the US to become the growth engine for the world.

Stronger US dollar undermines emerging markets

Events in the US are pointing towards the likelihood, and indeed necessity, for the US dollar to strengthen against other currencies. This wouldn’t be good for emerging markets, especially those with currencies linked to the US dollar. These countries will also have to cope with the fall-out from any trade war emanating from the US.

Trade concerns unsettle markets

Trade continued to be one of the key risks and concerns for markets. Trump remained strong on his protectionist stance to the dismay of existing trading partners and allies. The chaos surrounding the G7 summit in Charlevoix, Canada, in June proved the point. At the moment, Trump’s hard-hitting approach is looking pretty painful and the threat of escalation is weighing heavily on equity markets.

Proposed tariffs on steel and specific goods are set to kick in. China, Europe and Canada are currently set to respond in kind. There has been talk of behind the scenes negotiations to waive tariffs on vehicles between the US and Europe. This could be a sign that an all-out trade war can and will eventually be avoided.


Markets face risks from the threat of a trade war; the oil price; financial market volatility; and political events in Italy. This, combined with high market levels and stretched valuations, warrants a degree of caution. Equity markets have been quite unsettled of late and that looks set to continue. Talks around trade are going to be the key influencer over coming weeks. If trade war fears abate, investor confidence should return but any signs of an escalation in tit-for-tat tariff measures won’t be received well.

Against this backdrop, we maintain our mildly cautious investment stance and are adopting a neutral positioning in our portfolios. This has been validated in recent weeks as equities have pulled back. There are positives out there, particularly in the US, but too much uncertainty prevails. In light of the prospects for the US dollar and the negative impact the currency strengthening would have on emerging markets, we have reduced our exposure to the region in favour of the US. Elsewhere, we have reverted to our neutral long-term stock allocations until a clearer picture emerges.


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: July 2018. CAM07173.