Weekly Market Update

18/09/2017

Hurricane risk diminished whilst tensions surrounding North Korea eased at the beginning of last week sending US equity markets to record highs. However, it was not long before geo-political risk escalated as North Korea launched a second missile over Japan, prompting missile drills from South Korea and further warnings from the US.

The latest missile launch followed the imposition of fresh sanctions by the United Nations Security Council. These sanctions include restricting oil imports, banning it from exporting textiles and ending new visas for North Koreans seeking to work abroad. To get Russia and China to agree to the measures, however, the limits on oil imports were watered down. Nevertheless, the sanctions are likely to have a major effect on the North Korean economy.

UK inflation beat forecasts to rise to 2.9 per cent in August, from 2.6 per cent in July. However, it looks likely that inflation will fall back next year, as the effect of Brexit-induced sterling weakness falls out of the year-on-year calculation. This means less pressure on the Bank of England to consider raising interest rates in the near term.

However, the minutes of the MPC meeting showed that attitudes had hardened and that monetary policy could be tightened by a somewhat greater extent over the forecast period than current market expectations. But hiking would clearly damage the financial outlook of overly indebted consumers and an increase in default rates in parts of the consumer credit market would not be welcome at this stage from the midst of a withdrawal from Europe. Despite no hike, sterling rose as the committee now sees a need to reduce stimulus over the coming months, in line with central bank rhetoric that is being repeated across the world.

US inflation rose, supporting a rise in expectations that the Federal Reserve will raise borrowing costs once again this year. The consumer price index rose 0.4 per cent in August from July, proving a 1.9 per cent figure for the year. While improving from recent lows, there is no sign of a regime shift in US inflation, despite the tight labour market. Globalisation and technology continue to dampen prices.

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