Weekly Market Update

02/05/2017

US Congressional leaders finally agreed on a funding bill preventing large parts of the US federal government from shutting down. The bill will likely fund the government until 30 September, while releasing the first funds for a big boost to military spending promised by President Trump. The agreement followed the recent proposal from the Trump administration, to slash tax rates for businesses and on overseas corporate profits returned to the country. However, it offered no specifics on how it would be paid for without increasing the deficit.

The US economy expanded at an annualised clip of 0.7 per cent over the first three months of 2017, down from the 2.1 per cent seen in the preceding three months and below expectations. A slowdown in household spending to just 0.3 per cent was the main driver of the weakness in GDP, even as investment in businesses jumped by 22.1 per cent, their biggest rise since early 2014.

The US Federal Reserve will make an announcement at the end of its two-day monetary policy setting meeting this week. Economists expect the central bank to leave interest rates unchanged, with many expecting it to next lift interest rates in June. With the Fed projected to raise interest rates at least twice more this year, focus has turned to when it will begin winding down its $4.2tn balance sheet.

European investors signalled their relief at Macron’s first-round victory, with European equities rallying. Mr Macron came in slightly ahead of Ms Le Pen in the first round of the election. He is now widely expected to secure a comfortable victory in the second round as supporters of the other unsuccessful candidates rally around him to prevent Ms Le Pen from winning. Any deviation from this result will certainty shock markets from here.

The annual rate of core inflation in the Eurozone shot up from 0.7 per cent in March to 1.2 per cent in April, adding pressure on Mario Draghi to consider his position on the ECB’s stimulus programme. Mario was quick to highlight that the Eurozone’ economy was still at risk of faltering despite evidence of a strengthening recovery. Underlying inflationary pressures were yet to show a convincing upward trend.

UK GDP growth also experienced a sharp slowdown to 0.3 per cent in the first quarter of 2017, significantly below the 0.7 per cent figure of Q4 2016 and undershooting analysts’ expectations. Slower growth was mainly due to a slowdown in services, which only grew by 0.3 per cent. UK economic momentum has been slowing this year, mainly on the back of weaker consumption as the fall in sterling pushed inflation higher, eroding households’ purchasing power. At the same time, investment intentions look to have stabilised and the benefits of the weaker currency have slowly started feeding through. This suggests that consumer weakness could be offset, at least partially, by better investment and trade numbers.

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