Weekly Market Update

15/05/2017

Global equity investors started the week with some positivity, as Emmanuel Macron’s victory in last Sunday’s final round of the French presidential election settled nerves in the Eurozone. However, the political upset of Donald Trump’s firing FBI chief James Comey sparked considerable outrage prompting comparisons with Richard Nixon and the Watergate Scandal.

Last week’s US data disappointed, as the core rate of inflation fell back below 2 per cent to 1.9 per cent, while retail sales estimates were missed. The data comes as the Federal Reserve continues to monitor inflation as it mulls its next interest rate rise and considers when to begin unwinding its balance sheet.

In corporate America, Apple exceeded US$800 billion in market capitalisation, making it the largest company ever. Apple’s market cap is now larger than the nominal GDP of the Netherlands. The latest surge in Apple’s shares was explained by the hype about the forthcoming iPhone 8, with rumors of its 3D facial-recognition system.

In the UK, the looming election inevitably dominated the headlines, while the Bank of England also provided some interesting forecasts on growth and inflation predicting a bigger than expected short-term slowdown in consumption. This followed disappointing industrial production figures adding downward pressure on sterling. The fall in sterling is likely to keep inflation above the 2 per cent target throughout the next three years.

Within that, a slowing in consumption growth will partly be balanced by rising net trade and investment, which provide more support to activity than in the recent past. Household consumption growth seems to be slowing in response to the weak real income growth associated with sterling weakness post Brexit.

Meanwhile, the Bank of England kept interest rates unchanged at 0.25 per cent with a strong majority. The MPC is forecasting the rate to remain at this level throughout 2017 and to rise to just 0.5 per cent by mid-2020. However, the committee said monetary policy may need to be tightened more than the markets expect over the next three years. But they may struggle with this estimate given the challenges ahead.

The price of Brent crude fell last week, its lowest level since November, as traders became impatient with OPEC’s attempts to force a return to higher oil prices, while US shale production continues to increase following their ability to operate profitability as low as $50 per barrel. However, in response to the surge in US shale production, Saudi Arabia and Russia have signalled they intend to continue to extend the deal reached to cut production by 1.8 million barrels per day as agreed in November last year.

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