Weekly Market Review

29/05/2017

The recent tragic events in Manchester alongside subdued UK economic data had little real effect on market behaviour last week. Sterling weakness provided support for overseas equities after the currency witnessed its biggest fall since April, after polls suggested the Conservative party’s lead in the UK general election was narrowing.

UK GDP was revised downwards to 0.2 per cent, due to weaker household consumption, while construction and manufacturing also showed little growth. Households continue to face several challenges including negative real wage growth as inflation continues to leave consumers with less disposable income.

China’s markets suffered after ratings agency Moody’s downgraded the country’s debt on concerns surrounding the future of its economy. The downgrade reflects Moody’s expectation that China’s financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows. The downgrade is yet another sign of the challenges faced by China, which is juggling rising leverage issues, declining growth rates and ongoing structural reforms.

Investors were relieved US President Donald Trump’s first full budget plan was largely as expected. It called for a hike in infrastructure and military spending, along with a raft of politically sensitive cuts, in areas such as healthcare, with the aim of reducing government spending by $3.6 trillion and balancing the budget over the next decade.

The US economy grew faster than initially reported during the first quarter of the year. Gross domestic product grew at a 1.2 per cent annual rate in the first three months of 2017. First-quarter GDP numbers have tended to be lacklustre in recent years because of seasonal factors that statisticians struggle to strip away from the data.

Minutes from the US Federal Reserve meeting highlighted potential plans to reduce their balance sheet. The health of the economy is starting to see interest rate rises and the next logical step is to set to unwind the stimulus. While the pace of hikes has been gradual, there is the possibility that monetary tightening could become more rapid if the unemployment rate fell appreciably more than expected, if wage growth accelerates aggressively, or if Congress embarks on a highly stimulative fiscal policy.

OPEC agreed to extend its oil supply cuts for another nine months to reduce supply that has kept oil prices lower. Markets appeared disappointed that the cuts were not deep enough or extended out for a further period. OPEC’s control over the market has been challenged by the rapid rise of the US shale industry, which has transformed America into a major oil producer that threatens OPEC and Russia’s hold over global supplies. US Shale could potentially drive up production adding further downward pressure on oil prices.

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