Market update – August 2019

Brexit continues to dominate the news in the UK as the new deadline of 31 October approaches. Boris Johnson beat Jeremy Hunt during July to become the new leader of the Conservative Party and the UK’s new Prime Minister.

The new Government’s harder-line approach to Brexit – and the increased prospect of no deal – has seen the pound fall to its lowest level against the euro since 2009 and its lowest level against the dollar since 1985.

Against this backdrop, the first estimate of UK growth for the second quarter of 2019 came in at -0.2%, following robust first quarter growth of 0.5%. The negative figure was partly attributed to the unwinding of preparations for the original Brexit date of 31 March, meaning it is likely that some growth will return for the third quarter and an immediate recession will be avoided. The Bank of England downgraded its forecast for overall 2019 growth to 1.3% and the same for 2020, although these figures assume the UK leaving the EU with a deal in place.

The picture for Northern Ireland looks gloomier, with the Ulster Bank PMI (Purchasing Managers Index) survey reporting private sector business activity falling in July for the fifth month in a row. First quarter growth for Northern Ireland was calculated as 0.3%, slightly below the UK as a whole, with second quarter data not due to be published until October.

As expected, at the end of July the US Federal Reserve (Fed) implemented its first cut in interest rates since December 2008, reducing its key federal funds rate by 0.25% to a range of 2-2.5%. In its statement, the central bank cited uncertainties to the outlook, including the impact of “muted” inflation pressures alongside the implications of broader global developments. Economic growth in the US lost traction during the second quarter of 2019, as the trade conflict between the US and China took its toll on export growth. Growth in the US economy was 2.1% in the second quarter of 2019, compared with first quarter growth of 3.1%.

China’s economy grew at an annual rate of 6.2% in the second quarter of 2019, its slowest rate in 27 years. However, analysts highlighted that some slowdown was inevitable and retail sales, industrial production and fixed asset investment were all well above consensus estimates.

Prospects for growth in the eurozone have also continued to deteriorate, according to President of the European Central Bank (ECB) Mario Draghi, who said that fiscal policy would be “of the essence” if the outlook continued to worsen. His words stoked expectations for further monetary easing, perhaps as early as September. German exports fell by 8% in June, their steepest annual decline in 3 years, underscoring the plight of the manufacturing sector as global trade tensions escalate. Germany narrowly avoided a recession at the end of 2018 and has forecast growth for 2019 of just 0.5%.

Despite this mixed economic data, the markets continued the largely positive trend of 2019 throughout July, with the FTSE100 rising by 2.2%, the Dow Jones Industrial Average rising by 1.0% and Japan’s Nikkei 225 Index rising by 1.2%. However, the Fed’s rate cut seems to have confirmed investor’s fears of a slowdown in global growth. Added to the increased tensions between the US and China and continuing unrest in Hong Kong over the controversial extradition bill, this has resulted in sharp falls across all major markets for August to date.

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