Weekly Market Update

27/11/2017

The UK economy grew at 0.4 per cent in the third quarter of the year, in line with expectations. However, UK consumer confidence fell sharply reaching lows last seen in the aftermath of the Brexit vote. Consumers remain concerned over potential interest rate hikes, and signs of a slowdown in the housing market.

Within the Budget, UK growth was revised downwards for the next five years, attributing much of the blame to continuing low productivity. The downgrades will complicate the Chancellor’s target to reduce the UK’s deficit to 2 per cent of GDP by 2021. Whether Hammond’s announcement of extra funding for research and development, artificial intelligence, and electric and driverless cars helps boost productivity remains highly debatable.

The US Federal Reserve signalled a near-term rate rise despite addressing the inflation question. The US is faced with above-trend growth and a labour market that is at full employment. However, inflation remains below target and presents policymakers with a challenging balancing act to manage. If interest rates remain at low levels, then this could create imbalances and further excesses in financial markets.

Investors seemed undeterred by the resignation of Federal Reserve Chair Janet Yellen, who stated that she will leave her position once her tenure ends in February. Yellen’s departure comes well before her position as governor ends in 2024, giving President Trump an unexpected opportunity to further shape leadership of the central bank.

Germany’s biggest opposition party may have thrown a lifeline to Angela Merkel. Social Democrat Secretary General Hubertus Heil said he was open to talks on backing a government led by the embattled Chancellor, which may eliminate the need for new elections. However, Merkel has made clear she would prefer a fresh election to leading a minority government to break the political stalemate. Economically, German companies are more confident than ever, with recent surveys hitting record high.

Chinese shares saw their largest one day fall in 17 months, with the Shanghai Composite falling 2.3 per cent last Thursday. Although a relatively limited fall, surveys are suggesting that more than 2,000 Chinese companies pointed to contraction in the industrial sector over the third quarter, as overcapacity persists, and the cost of raw materials has increased.

Oil prices rose last week following the shutdown of TransCanada’s Keystone pipeline. In addition to the pipeline remaining at just 15 per cent of capacity, investors are also hopeful that OPEC, the cartel of oil-producing nations, will extend the current production cuts beyond March 2018.

 

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