Weekly Market Update

18/04/2017

Traditional safe-haven investments such as gold, US Treasuries and the Japanese yen were all boosted by growing worries about the global geopolitical climate last week. With the looming threat of further US missile strikes on Syria causing tensions between Washington and Moscow, and the possibility of President Trump taking an increasingly aggressive stance over North Korea, risk aversion was considerable.

However, the largest attack from President Trump was arguably on his own currency, making strong suggestions that the US dollar was making it very difficult for US companies to compete when other nations were devaluing their currency. Trump stopped short of pointing the finger at China, given their need not to jeopardise relationships in the midst of a North Korean crisis.

The US President has been relatively consistent in his pledge to weaken the dollar which strongly contradicts his stimulus plans consisting of tax cuts and infrastructure spending which would likely produce higher growth and inflation. This has left the President with a difficult juggling act to follow and puts himself at odds with the US Federal Reserve members who have already started to tighten monetary policy.

In the UK, inflation stabilised at 2.3 per cent in March, while real wages grew at the slowest rate since 2014, suggesting that we are entering a difficult period for the consumer. Lower global oil prices have helped UK living standards by keeping inflation down. But this effect is now falling away and wage growth has not accelerated to keep pace with rising consumer prices.

The Chinese economy grew at 6.9 per cent in first quarter, driven by a surge in industrial activity, property investment and credit growth. First quarter industrial production rose 6.8 per cent year-on-year, with growth in March accelerating to 7.6 per cent. Retail sales also rose 10 per cent year-on-year, and were also strongest in March.

China’s relatively robust growth is paired with rising levels of corporate debt, with credit growing at more than twice the rate of the underlying economy. The country’s overall indebtedness is creeping towards 300 per cent, most of it concentrated in the corporate sector, and there appears no appetite to tackle the issues any time soon.

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