Market update – December 2017

The mechanics and implications of Brexit continued to dominate newsflow during the past few weeks. Discussions over the future of the border between Ireland and Northern Ireland intensified, with Europe explicitly rejecting the idea of a hard border. Agreement was eventually reached, paving the way for talks on the future trading relationship.

The European Commission (EC) predicted that the eurozone’s economy will expand by 2.2% in 2017 and 2.1% in 2018, easing to 1.9% in 2019. However, political issues continued to put investor sentiment under pressure. Spain’s central bank warned that the ongoing political crisis in Catalonia could seriously undermine economic growth and financial stability over the coming months, both regionally and at a national level. Meanwhile, in Germany, coalition negotiations between Chancellor Angela Merkel’s CDU/CSU bloc and the Green Party collapsed, triggering fresh uncertainties. The Dax Index fell by 1.6% during November, while France’s CAC 40 Index declined by 2.4% and Ireland’s benchmark ISEQ 20 Index fell by 0.5%.

The eurozone’s rate of inflation rose from 1.4% in October to 1.5% in November, although core inflation – which excludes the effects of volatile factors such as energy and food – remained unchanged at 0.9%. The ECB continues to pursue an inflation target of around 2% over the medium term. The region’s rate of unemployment edged down during October, falling from 8.9% in September to reach 8.8%, its lowest level since January 2009.

UK interest rates rose for the first time since 2007 during November. Despite this, investors appear to be confident that any further increases will be very gradual, and the FTSE 100 Index reached a new high during the month. Although UK share prices generally fell over November as a whole, medium-sized companies fared slightly better than their larger counterparts: the FTSE 250 Index declined by 1.4%, while the blue-chip FTSE 100 Index fell by 2.2%.

Despite the disruption caused by Autumn hurricanes, the US economy posted strong growth for the third quarter, expanding at an annualised rate of 3.3%. Expansion was underpinned by robust investment and export activity that helped to offset a slowdown in consumer spending growth. The rate of unemployment fell from 4.2% to 4.1% in October to reach its lowest level since December 2000.

Despite fresh displays of aggression from North Korea towards Japan, the share prices of large Japanese companies generally rose during November. The Nikkei 225 Index climbed by 3.2% over the month, while the Topix Index rose by 1.5%. In comparison, medium-sized companies – represented by the TSE Second Section Index – fell by 2.2%.

Japan’s economy grew at an annualised rate of 1.4% during the third quarter. Although private consumption was subdued, dropping by 1.8% year on year, this was mitigated by stronger export activity. During November, the Government hailed the “remarkable progress” of Prime Minister Shinzo Abe’s economic reforms.

Share prices in China generally declined during November, dampened by some lacklustre economic data, and the Shanghai Composite Index fell by 2.2% over the month. In a move designed to relax restrictions on market access to China’s financial sector, the country’s Government announced that it would ease limitations on foreign ownership in the financial sector, including the banking, securities, fund and insurance industries. The Government also intends to reduce tariffs on cars “gradually and properly”.

The price of oil reached its highest level since the middle of 2015 in November, following a sudden anti-corruption purge in Saudi Arabia – one of the most influential members of the Organisation of Petroleum Exporting Countries (OPEC). The price of a barrel of Brent crude oil rose above US$64 during the month. At the end of November, OPEC – alongside other oil-exporting countries that are not members of the cartel – announced that previously agreed curbs on production would be extended until the end of 2018. The output limits were originally introduced in December 2016 in a bid to support the oil price by cutting oversupply.

The outlook for sovereign creditworthiness in 2018 is generally stable, according to credit ratings agency Moody’s, underpinned by expectations that the “healthy” and “synchronised” global economic growth of 2017 is likely to continue into 2018. Although high levels of debt and ongoing geopolitical tensions continue to pose a threat to growth and investor sentiment, this is likely to be mitigated by solid momentum in economic expansion. Looking ahead to 2018, 74% of sovereigns have a “stable” outlook and 10% have a “positive outlook”; in comparison, only 16% have a “negative” outlook compared with 26% at the end of last year, indicating that fewer downgrades in sovereign ratings are expected in 2018 than in 2017.

Closer to home, the latest official figures show that the Northern Ireland economy fell by 1.0% in the second quarter of 2017. Output is measured using the Northern Ireland Composite Economic Index (NICEI), which is roughly equivalent to Gross Domestic Product (GDP). The drivers behind the slowdown in the Northern Ireland economy are the same as those affecting the rest of the UK – a consumer squeeze brought about by high inflation and Brexit-related uncertainty weighing down on business investment.

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