Weekly Market Update


Global equity funds attracted their biggest weekly inflows in more than a year, as investors grew increasingly confident that central banks would support financial markets with looser monetary policy. Sentiment was also boosted following confirmation that President Trump would meet with President Xi at the G20 Summit in Japan. Any signs that talks are formally moving ahead will be well received in markets but the political angle from Trump should not be ignored.

The US Federal Reserve held interest rates steady but shifted towards a more dovish stance pointing towards possible interest rate cuts in the future, citing uncertainties over slowing growth, a lack of inflation and rising trade tensions. This language marked a change from the Fed’s previous stance implying it would be patient in determining changes to interest rate policy.

In Europe, Mario Draghi, president of the European Central Bank, highlighted it could consider expanding its €2.6tn bond-buying programme to help increase inflation in the eurozone. At the Bank of Japan, too, governor Haruhiko Kuroda indicated last week that extra stimulus would be an option, if consumer prices consistently fall short of the bank’s 2 per cent inflation target.

The Bank of England failed to join the dovish party, leaving rates on hold at 0.75 per cent and noting that further rises were likely to be required at a gradual pace and to a limited extent. This comes despite the MPC saying downside risks to growth have increased. They also commented on increased Brexit uncertainties leading to a decline in the sterling exchange rate.

Last week’s news from the central banks is a reminder that monetary policy will continue to address economic concerns. However, geopolitical risks remain elevated, whilst domestic concerns around Brexit are ever-present. For the moment, equity markets are seeing only the positives in the central bank moves which has created more positive stock market momentum, but this cannot carry on forever.

Recent weakness in sterling as a result of ongoing concerns over politics following the Conservative leadership contest concluded. Boris Johnson and Jeremy Hunt will now go head to head seeking the votes of conservative party members, with the result likely around 22 July. Both candidates have said they will seek to renegotiate the EU Withdrawal Agreement in due course, a tactic that remains likely to face significant pushback in Brussels. Once we know the new Prime Minister, and politicians return from their summer break, the risks of a ‘no-deal’ Brexit are likely to come into sharper focus, not least given the lack of time before the 31 October.

Tensions in the Middle East continued to escalate with a corresponding increase in the oil price, after news emerged that Iran had shot down a US drone, claiming it had violated their airspace, and on the back of this it seems the President considered a military strike in retaliation.  Outside of the moves in the oil price, markets have ignored the rising tensions, with attention focused more on the activities of the central banks.

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