Weekly Market Update

28/01/2019

Optimism on the prospects on improved trade relations between the US and China diminished somewhat last week, with the US playing down expectations for a resolution to the US-China trade war. Meanwhile, concerns that the longest US shut down in history could damage economic growth mounted. The US Senate has rejected two bills to end the government shutdown, leaving no end in sight.

Domestically, sterling rallied following hopes that the UK would avoid a no-deal Brexit, particularly after the Labour Party said it could support legislation that delayed Britain’s departure from the EU. This followed proposed legislation from Conservative Nick Boles and Labour’s Yvette Cooper that would give MPs a vote on extending the Article 50 exit process.

The World Economic Forum was held in Davos, with the rich and powerful meeting for their annual shindig. The tone was muted, with the political failings of Europe and the US a major theme. More notable, though, were the absentees. They included PM Theresa May, President Trump, President Xi Jinpin and President Macron, who were contending with their own challenges on home turf.

The International Monetary Fund warned that the world economy will slow and likely to get worse if countries keep squabbling over trade. Investors’ interest rate expectations have reduced considerably since the US Federal Reserve meeting in December. If the pace of rate rises is indeed slower than previously expected, this could provide a boost to investor confidence.

German business sentiment fell to its weakest level in almost three years as trade uncertainties and weaker growth in China amplified concerns over the economic outlook. The Ifo Institute’s gauge of corporate confidence in Europe’s largest economy fell for the fifth consecutive month.

Real wages in the UK grew at their fastest pace for two years, with a tight labour market and lower inflation driving improvements in household confidence. Average weekly earnings, excluding bonuses, rose 3.3 per cent year on year in the three months to November. However, real wage growth was still well below the 1.7 per cent rate seen just before the 2016 referendum, so that even with continued pay growth, returning to pre-crisis increases appears a distant prospect.

Inflation in Venezuela is expected to rise significantly this year according to the IMF. The political crisis in the South American nation took a dramatic turn with the decision by Donald Trump and several Latin American countries to recognise the opposition leader, Juan Guaidó, as the country’s interim president. The decision inflamed tensions, bolstering critics of socialist President Nicolás Maduro who has responded by cutting ties with Washington.

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