Weekly Market Update


Investors woke up to a hung parliament on Friday morning following Theresa May recent gamble to strengthen her hand by calling an early election, which ultimately back fired. What was intended to bring stability and cohesion to the UK, has brought further uncertainty amid the Brexit negotiations. The prime minister has now lost the authority to deliver a hard Brexit and will now have to bow to pressure for a softer business friendly approach.

It is difficult to see how Theresa May will be able to remain as Conservative leader for long. She began the election campaign with a sizeable lead and was widely predicted to extend her majority. However, a lacklustre campaign and criticism of the Prime Minister has denied the Tories the majority that once looked so certain.

The initial response from markets was subdued with sterling falling at the margin, providing an uplift to FTSE 100 stocks that obtain earnings overseas. Even domestically focused companies only marginally fell, a very different response compared to the outcome of the European referendum.

The recent currency fall will stoke UK inflation, however if we get a softer approach to Brexit the UK currency will likely stabilise and could even strengthen in the short term. However, the momentum of UK economic growth has been fading as we move through 2017.  Retail sales growth, house prices and inflation adjusted incomes are all weakening in what remains a very consumption driven economy.  This election result and the continued uncertainty it brings suggests that this trend will continue.

The European Central Bank held interest rates in line with market expectations, but the language used was slightly less dovish. Although the Eurozone economy grew by 0.6 per cent in the first quarter, its fastest quarterly expansion since 2015, inflation had dropped back to 1.4 per cent in May, from 1.9 per cent in April. Mario Draghi, previously highlighted that the inflation pickup was more to do with global factors that had since waned and that the ability to create domestic inflation within the Eurozone, primarily through higher wages is still unproven. For now, there will be limited policy changes in terms of interest rates and reducing stimulus.

In France, voters were called to the first round of the French Parliamentary elections. Voters reaffirmed their support for Macron. If this continues into the second round this Sunday, then an overall majority is not only possible but the most likely outcome. However, only half of French voters chose to turn out, a record low for a first round of parliamentary polls.

Saudi Arabia and its allies, cut diplomatic ties with Qatar on accusations that the tiny rich Gulf state is harbouring and financing terrorism. However, Saudi Arabia’s official rhetoric has been questioned by some, with the reason for the cut in ties attributed to geopolitical jostling between the two main strategic players in the Middle East. Nevertheless, oil prices continued downward after the US government reported an unexpected increase in US crude stocks, confounding expectations of a fall in supply.

Despite the recent increase in political uncertainty, the global economy still looks set to grow at an above-potential rate during the second half of 2017. Supported by both developed and emerging markets, global macro data recently improved again, if somewhat more slowly and with increasing divergences at the country level. While macro data for the US and the UK weakened recently, they remained strong in the euro area, in Japan and in several emerging markets.

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