Weekly Market Update


After months of brinkmanship, the US and North Korea signed a document confirming that North Korea will work towards dismantling its nuclear capabilities. The lack of a positive response though may reflect the fact that the agreement still lacks some detail and given the unpredictable and volatile nature of the two leaders, there’s no guarantee that it won’t run into significant difficulties.

President Trump ratcheted up his trade war with China, after imposing tariffs on about $50bn worth of imports. The new import taxes, aimed at forcing Beijing to stop what the US claims has been systematic theft of US intellectual property, will apply to a wide variety of products. China swiftly responded providing their intention to impose their own tariffs. Although these tariffs only represent a very small element of global trade, the fear of escalation continues to worry markets.

The US Federal Reserve raised interest rates by 0.25 per cent and said it expected two more interest rate rises this year. Fed chairperson Jerome Powell stated the economy had strengthened significantly since the 2008 financial crisis and was approaching a normal level that could allow the Fed to soon step back and play less of a hands-on role in encouraging economic activity. The hike surprised no one, but tweaks to the Fed’s forward guidance has provoked more of a stir in the markets as the central bank intends to hold press conferences after every meeting in 2019, providing more forward guidance than is probably needed.

The pace of wholesale inflation in the US climbed by the most in four months in May, pushing annual figures to their biggest jump since 2012. The producer price index rose 0.5 per cent in May from the previous month, with energy costs making the largest contribution. That took the annual growth rate for headline inflation to 3.1 per cent, the quickest increase since January 2012, and core inflation to 2.4 per cent. With price pressures still building gradually throughout the economy, the Fed will be compelled to continue raising interest rates once a quarter.

In contrast to the hawkish tone emanating from the Fed, the European Central Bank (ECB) said at its meeting that it did not expect to raise interest rates before the end of summer 2019. The ECB also announced that it would end its bond-buying scheme, worth €30bn a month, in December despite a recent slowdown in the Eurozone recovery.

However, the ECB’s decision will not shrink the number of bonds held by the ECB, since it will continue to roll over maturing debt into new purchases. Mario Draghi said central bankers had not discussed when it will begin to rein in the balance sheet it built up throughout QE, a move likely to push up corporate borrowing costs. The bank confirmed its commitment to reinvest proceeds for an extended period after QE ends, and in any case for as long as necessary to maintain favourable liquidity conditions.

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