Weekly Market Update

14/05/2018

The Bank of England left interest rates on hold and played down the current economic soft patch. The Bank trimmed its inflation forecasts and cut its growth outlook, but Governor Mark Carney stated that he expected the economy to recover speedily, despite signs of more cautious consumers.

The MPC now sees inflation cooling only three months after it saw it moving higher and anticipates only limited tightening in the future; the markets are effectively pricing in no hikes for this year, which initially sent sterling lower.

Britain’s manufacturing sector contracted during March, highlighting the sluggish economic performance in the first quarter. Manufacturing output fell by 0.1 per cent compared to the previous month as both domestic and export orders fell. The decline was slightly smaller than analysts had predicted. Overall, manufacturing was broadly flat throughout the first quarter following several months of strong growth.

Oil prices climbed to their highest point in three and a half years as US President Donald Trump withdrew from the Iranian nuclear deal and re-imposed the highest level of economic sanctions on the country. His decision to break ranks with his allies and withdraw from the accord pushed the oil price higher, as curbing Iran’s ability to export oil will likely limit global supplies. This action has the potential to endanger stability in the Middle East and have repercussions for big companies doing business with Iran. The nuclear deal with Iran also remains crucial for the security of the region.

In a surprise move, Argentina announced talks regarding a financing deal with the International Monetary Fund (IMF). The country has been suffering financial turmoil, with interest rates recently hitting 40 per cent.  President Mauricio Macri said IMF aid would strengthen growth and help avoid crises of the past. It is 17 years after Argentina defaulted on its debts and 12 years since it severed ties with the IMF.

Italian bonds came under further pressure last week following increased political risk as investors fixated on political negotiations aimed at forming a government. Italy’s anti-establishment Five Star Movement and the far-right League are getting closer to forming a government. The former has a populist agenda, while the latter is far-right in its policies; both are Eurosceptic in nature. The political situation in the country has been fraught ever since general elections in March. If the Five Star Movement were to lead the new government, it would not be viewed as market friendly, but Italian investors have a certain amount of experience with political uncertainty

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