Weekly Market Update

17/12/2018

Despite the uncertainties surrounding Brexit, the UK equity market was relatively resilient last week. UK Prime Minister Theresa May won an internal Tory Party vote of confidence and will remain unchallenged as party leader at least for the next year. This followed the postponement of last week’s vote on the withdrawal agreement as it was unlikely to be passed by parliament in its current form. If the agreement cannot pass parliament, a no deal exit is more likely although there is the ability to postpone the Article 50 withdrawal before we leave on March 29 next year. Given that the Christmas recess begins this Thursday, it is unlikely that anything will be achieved until next year, so for now the uncertainty continues.

UK average weekly earnings, including bonuses,rose by 3.3 per cent on the year in the three months to October, the biggest rise since July 2008. Although retail employment has struggled the overall labour market remains relatively robust. The Bank of England continues to make noises surrounding the need to raise interest rates to gradually offset wage driven rises in inflation. However, recent figures show slowdowns in both manufacturing and construction that could lead to lower levels of employment in the new year,making any interest rate rises unlikely. The real worry is that GDP only increased by 0.1 per cent in October and was flat in the previous two months,which could pave the way for a potential recession next year.

The European Central Bank confirmed the end of its asset purchase scheme but otherwise kept policy broadly unchanged, promising protracted stimulus for an economy struggling with a slowdown and political turmoil. The central bank repeated its promise that rates would be kept at their current record lows at least through next summer and that it would keep open-ended the time horizon for reinvesting cash from maturing bonds. The ECB lowered its eurozone forecasts for growth this year and next in the face of increased general uncertainty, with risk more balanced towards the downside.

China’s economy slowed again in November, with retail sales and industrial production both weakening. Even as Chinese exports have remained resilient in the face of US tariffs, weak consumer spending and slowing investment in housing construction are weighing on China’s economy. Chinese policymakers have injected cash into the banking system and fiscal authorities have pledged to increase infrastructure spending, but the latest data suggest that further measures are likely.

US core inflation edged up to 2.2 per cent year on year in November, from 2.1 per cent the previous month. While the US central bank is still widely expected to raise interest rates for a fourth time this year when it meets on Wednesday, the outlook for further rate rises in 2019 has become murkier amid trade worries, market turmoil and dovish comments from Federal Reserve chair Jay Powell. Markets are pricing in a 34 per cent chance of a rate hike next year. Low by anyone’s standards.

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