Weekly Market Update

18/02/2019

Trade talks concluded in Beijing last week with limited progress. However, markets remain confident that a solution can be found before the March deadline. As negotiations restart in Washington this week markets have firmly placed momentum in a positive conclusion. Any other outcome would clearly be negative for global trade and investor confidence.

UK GDP expanded by 0.2 per cent in the fourth quarter of 2018, down from 0.6 per cent in the third quarter and below expectations. This dragged annual GDP down to 1.4 per cent in 2018, the lowest growth since 2012. Monthly figures showed the economy contracted 0.4 per cent in December, as the government stalled on Brexit. Brexit is clearly having a negative impact on sentiment and growth, and it raises the risks of a technical recession later in the year.

Members of the pro-Brexit European Research Group of Conservatives inflicted another embarrassing parliamentary defeat on Theresa May after they refused to endorse her approach to resolving the deadlock over the Irish border. Sterling was volatile while UK equities ending the week on a high. A delayed Brexit has been given a higher probability which would likely result in lower GDP growth than current forecasts. Much would depend on how long the delay to the UK’s departure is and what final form Brexit will take.

UK consumer prices increased at an annual rate of 1.8 per cent, down from 2.1 per cent in December. These figures facilitate the Bank of England maintaining a wait-and-see approach on interest rates until a Brexit outcome is finalised. For now, below-target inflation is expected to continue in the near term.

Germany managed to avoid slipping into recession by a narrow margin after fourth-quarter GDP came in flat. Elsewhere a snap general election was called in Spain on April 28. Prime Minister Pedro Sánchez made the announcement two days after his Socialist government suffered a defeat in Parliament after failing to get its 2019 budget passed.

US retail sales unexpectedly plunged in December by the most since 2009. Although negative considering its a critical month for consumer spending some of these figures had been distorted by the government shutdown. Overall consumer spending still rose an annualised 2.5 per cent during the fourth quarter. Optimism among consumers and small businesses retreated in January indicators of global trade and manufacturing activity have been retreating as worries about trade tensions and slowdowns in China and Europe affect corporate sentiment. The decline in retail sales calls into question the domestic growth assumption.

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