Weekly Market Update

24/07/2017

UK inflation unexpectedly fell to 2.6 per cent over the 12 months to June 2017, down from 2.9 per cent in May. Falling petrol & diesel prices were the main contributors to the drop in the annual rate. There have been recent talks surrounding the possibility of raising interest rates following the upward inflation trend. Given the structural weakness of the consumer, and the latest inflation figures, it appears these concerns are no longer valid.

Sticking to the script the European Central Bank left interest rates on hold and left the possibility for an increase in asset purchases if the economic situation deteriorated. Mario Draghi highlighted that any change would only happen gradually, preparing markets for a possible discussion in September on the long-awaited gradual decrease of the asset buyback program.

Draghi is attempting to walk a delicate balance by gradually unwinding his historic stimulus programme as the eurozone economy begins to grow without causing a taper tantrum by investors who have become accustomed to years of cheap money. Complicating the ECB’s task, eurozone inflation was damped by soft energy prices, as it fell to 1.3 per cent for the year to June, well below the bank’s target of just under 2 per cent.

The Bank of Japan cut its inflation forecast for the year to March 2018 from 1.4 per cent to 1.1 per cent, while trimming its forecast for the year to March 2019 from 1.7 per cent to 1.5 per cent. By delaying the date, it expected to hit its inflation goal, the central bank signalled it was unlikely to reduce its stimulus, with monetary policy staying extremely loose. This was the sixth time that the Bank has pushed back its inflation target, since Kuroda launched his huge asset-buying program in 2013.

The S&P 500 technology sector finally surged past its dotcom bubble peak of March 2000, but continues to see rapid earnings growth relieving immediate concerns that a bubble has formed. Technology companies are expected to generate more than 25 per cent of the S&P 500’s overall earnings in the fourth quarter of this year, compared with 15 per cent at the index’s peak in 2000. At that time, tech stocks accounted for more than a third of the benchmark S&P 500. Today that figure has fallen closer to 23 per cent. Although technology appears to be the driving theme with investors, valuations have risen significantly providing some reason to be cautious. For now, equity markets remain well supported with improving corporate earnings.

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