Market Updates

View PDF of this week's update from FE Analytics.
This week, we got further support for the status quo. Positive economic data, including a higher than expected GDP data was coupled with a decision from the central bank to leave things alone and let everything carry on as it is. Unfortunately, our political leaders don’t have the same appreciation for inactivity. Boris Johnson especially appears to believe that he gets paid by the word and treated us to what appears to be the opening salvo in his battle for the Tory leadership. While even Brutus would have raised an eyebrow at the amount of plotting going on in the Tory party, it does at least appear that they are giving up on trying to control Brexit and have instead focused on grasping the leavers of power afterwards.

Elsewhere, Hurricane Florence has made landfall in the Carolinas and has already begun to have a serious impact. A competent response to the storm will be critical for Donald Trump and the republicans if they are to retain any sense of credibility as a party of Government and to survive Novembers mid-terms elections. George W. Bush’s approval ratings never recovered from his botched handling of hurricane Katrina.

UK: Economic Growth Picks up over the summer
This week, the Office for National Statistics reported GDP results between the months of May to July. GDP grew by 0.6% during this period, mainly carried by the service sector which helped fuel the quickest economic growth for the UK this year. The cause of the growth was linked to positive results from the retail industry with factors such as the hot weather, England’s extended run in the world cup and the royal wedding all helping to drive sales this summer. In addition, the month-on-month output for the construction industry was also up 0.5% in the month of July.

Over the last 5 years, GDP has experienced quarterly fluctuations with slight increases in growth along with some periods of shrinkage. In the last two years the results have tended to fall between 0.2% to 0.4%. Overall, year-on-year GDP growth continues to be stable hovering above 0.5% with notable spikes recorded in the third quarters of 2012 and 2013.

Global: Lira Rallies after central bank's announcement
Turkey’s central bank decided to raise interest rates yesterday. The one-week repo rate was increased to 24%. The lira, one of the world’s worst performing currencies this year increased by 4.6% against the dollar shortly after the announcement. The move appeared to directly contradict president Erdogan’s earlier calls to reduce the interest rate in order to lower borrowing costs. Erdogan also proposed to outlaw the use of foreign currencies within the Turkish property market in a bid to help the flagging lira.

Meanwhile, the two biggest economies continued their standoff this week. President Trump recently applied additional duties on $50 billion of Chinese imports and this week, the White House are reviewing applying further tariffs to $200 billion worth of products. However, tensions look to be thawing as corn and soybean futures fell slightly. The prices for both commodities were propped up by supply concerns due to the Chinese government’s move to apply higher tariffs on a selection of US agricultural imports earlier this year.

Eurozone: European Central Bank Holds Interest Rates
The European Central Bank (ECB) announced net asset purchases to be cut back by EUR 15bn along with plans to end bond purchases by the end of this year. In addition, the ECB also announced that it will look to slightly cut its growth target for the periods of 2018 and 2019 along with keeping interest rates unchanged for the Eurozone. However, the council remains confident that it will reach its inflation target even with the cutback. ECB president Draghi, linked the downward revision to weaker foreign demand.

Elsewhere, political risks remain within the Eurozone. Sweden’s latest election ended in a deadlock. The centre-right bloc held 40.2% of the votes while the centre-left took 40.6% of the vote. The votes made by Swedes abroad are also expected to be counted this week but 99% of the votes have already been accounted for. Sweden faces a period of political uncertainty after both main parliamentary blocs fell short of the majority required. The prime minister confirmed that he would not be resigning because of the election and stressed the need for cross-party cooperation so that a new government can be formed.
Author: FE Analytics