Weekly Market Update

29/01/2018

US equity markets reached record highs boosted by strong quarterly earnings and economic data. Meanwhile, the FTSE 100 index was down over the week as stronger-than-expected UK employment data led to a strengthening pound, which hit companies that earn the bulk of their profits overseas.

World leaders descended on Davos once more to share perspectives on the theme of creating a shared future in a fractured world. However, Trump, the first US president to set foot in Davos since Bill Clinton back in 2000, make remakes regarding his America first philosophy causing a political backlash.

US economic growth undershot expectations in the fourth quarter with GDP expanding at 2.6 per cent, the slowest rate since the start of 2017. While trade numbers were weaker than expected, consumer spending figures, particularly durable goods orders were strong. Bringing manufacturing jobs back to America has been a key part of President Trump’s agenda and the sector has benefited from weakness in the US dollar and pick up in the global economy.

The International Monetary Fund (IMF) upped its forecast for world economic growth in 2018 and 2019, saying US tax cuts were likely to boost investment in the world’s largest economy and help its main trading partners. The IMF forecast global growth would hit 3.9 per cent for both 2018 and 2019.

The pound rose to its highest level since before the EU referendum. This followed positive data on UK employment, with wages rising more than expected in November and UK job vacancies reaching a new high in the same month. Wage rises, excluding bonuses, rose to 2.4 per cent ahead of expectations.

The UK economy also exceeded forecasts as GDP grew 0.5 per cent in the last quarter of 2017. Growth was boosted both by services and the manufacturing sectors, while the construction industry continued to suffer. The UK faces political uncertainty, negative real wage growth and a faltering housing market, which is expected to continue and keep growth expectation lower. But if UK businesses get the clarity that they need from the Brexit negotiations, stronger investment spending could follow. The UK might then benefit from the broader global recovery.

The ECB left interest rates unchanged noting that although the region’s growth prospects appeared positive, the euro’s recent appreciation was a risk to both future growth and inflation, making notable remarks towards the Trump administration for their part in talking down the US dollar.

Japan’s central bank governor Haruhiko Kuroda stated that there has been a slight pickup in inflation expectations and that they were getting closer to reaching the bank’s 2 per cent inflation target, fuelling speculation that the bank could be prepared to scale back the pace of quantitative easing. However, the Bank of Japan kept its policy settings unchanged and stating that the bank had not reached the stage at which it should start thinking about retreating from monetary easing.

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