Weekly Market Update

26/06/2017

While Brexit negotiations formally kicked off at the start of last week, exactly one year on from the UK’s decision to leave the European Union, there was mixed messages from the Bank of England’s Monetary Policy Committee. The dynamic has shifted with more committee members voting to raise interest rates, with Andy Haldane hawkish comments adding further speculation to the decision. This followed Mark Carney’s remarks which provided investors with some reassurance that it remained too early to tighten policy rates. If nothing else it is illustrating that the gap between committee members is widening.

Looking at the fundamentals, real wage growth continues to fall and is now negative. This has coincided with declining consumer confidence. Real earnings are beginning to feel the squeeze as the pound weakened, and inflation will likely to hit the 3 per cent mark by the end of the third quarter. The weakness of this recent data suggests that the likelihood of a rate hike this year remains low, despite the recent noise from the MPC. Wages need to rise alongside inflation before any tightening is likely.

After previous rejections of poor corporate governance practices, MSCI finally approved the inclusion of China A-shares in their emerging market indices, starting in June 2018. Initially making up 0.7 per cent of the index’s value, this will likely rise over time making this a significant game changer. This move will favour Beijing’s attempts to open up its financial markets and attract foreign capital. Longer term, this will benefit global growth and bring China into line with global standardised practices.

Oil was the main loser last week entering bear market territory, after news of increased supplies from Libya, Nigeria, and most importantly the US, continue to scupper attempts by OPEC and non-OPEC producers to cut global output. In the US, the Baker Hughes Rig Count Report has reported rig increases in the past 22 weeks in a row and now stand at 933. Oil prices are now languishing at the cheapest levels in more than seven months while non-OPEC production is also set to grow by 1.5 million barrels per day in 2018, slightly more than the expected increase in global demand.

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