Weekly Market Update

12/02/2018

The sell-off entered its second week which initiated over worries of a pick-up in inflation causing a rapid rise in bond yields. Falls were worsened by the implosion of an exchange traded product that allowed investors to bet on low volatility, as well as being exaggerated by algorithmic trading. In the currency markets, the Japanese yen and the Swiss franc strengthened as panicked investors sought safe havens. At times like these it is important to focus on the fundamentals which continue to be supportive for equities.

US Senate leaders reached a bipartisan budget deal that will keep the government funded for two years, lifting the caps on military and domestic spending. While the plan would end months of bitter political wrangling that has threatened to close the government repeatedly, it would also raise the US public debt burden to nearly 100 per cent of the country’s economic output.

The US trade deficit grew 12.1 per cent to its highest level since 2008, in Donald Trump’s first year in office, suggesting that the president is making little headway in his promise to rewrite America’s trading relationship with the world. However, the surge in the US goods and services deficit to $566bn last year was mostly caused by an improving domestic economy and rising demand from consumers and companies for imported goods. US exports grew 5.4 per cent to $2.3bn, their second-highest level on record, while imports reached a record $2.9bn in 2017.

In the UK, the Bank of England voted unanimously to keep interest rates on hold at 0.5 per cent, but the pound strengthened after a hawkish tone was detected from the Bank of England. This raised expectations that there could be a UK interest rate rise as soon as May. The pace of interest rate rises could accelerate if the economy remains on its current track and the recent rise in commodity prices could add pressure to current inflation figures.

Oil prices hit their lowest level in almost two months amid rising investor concern about market oversupply, as US domestic production hit an all-time high last month. After pumping 10 million barrels a day in November for the first time since 1970, the US Energy Information Administration expect US crude production to hit 10.1m barrels a day in January, the highest on record for any month. The agency upped its forecast for crude production over this year and the next, meaning the US will be producing more oil than the Saudis.

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