Weekly Market Update

26/04/2017

Rarely a week goes by without geopolitics taking center stage and last week did not disappoint. Turkeys’ referendum was followed by the announcement of a snap general election in the UK, while the French Presidential election overshadowed escalating tensions with North Korea. Although the world economy looks stronger than at any time since the global financial crisis, geopolitical fragilities are also higher than anyone would have predicted, even with volatility remains stubbornly low.

As well as concerns over geopolitical risks, US bond yields slid reflecting an easing of expectations that the US federal reserve would raise interest rates again at its next policy meeting in June, particularly following the recent release of weak US inflation and retail sales. Inflation expectations are falling reflecting both declining oil prices and the lack of ability of the Trump administration to achieve its stimulus measures.

UK Prime Minister Theresa May surprised market participates calling a UK general election on 8 June, which was soon ratified by MPs. This was contrary to her previous statements on the subject, but allows her to strengthen her hand in the forthcoming Brexit negotiations. Investors reacted negatively to the news but sterling witnessed a strong bounce as there is a reasonable chance that the conservative party will increase their number of seats held.

Across the channel, the markets gained support from the result of the first round of the French Presidential elections, with Emmanuel Macron and Marine Le Pen becoming victors, leaving voters with two radically different visions for their country. The result triggered a sharp rally in French bonds and global stocks on expectations that Macron will defeat Le Pen in the second round in early May. If the opposite occurs then the rally will be short lived and would have serious consequences for the Eurozone.

The oil price fell below $50 a barrel, as surging US inventories sparked concerns, while faith that an extension of OPEC led supply cuts would fail to materialise. Pressure continues to mount on OPEC which meets again on May 25th. Any downward pressure on the oil price will ultimately impact global inflation expectations ahead.

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