Market update – July 2018

Financial markets in June were soured by the rapidly deteriorating trade relationship between the US and China. The International Monetary Fund (IMF) warned that the US’s aggressive trade strategy risked harming the global economy and trading system, and suggested that a trade war would result in “losers on both sides”. During the month, China announced that it would impose levies of 25% on 545 US products worth a total of US$34 billion, and the EU announced a series of tariffs on £2.8 billion-worth of US products. Canada and Mexico also announced a range of levies.

The US Federal Reserve (Fed) raised its key interest rate during June by 0.25 percentage points to a range of 1.75% to 2%. This was the second increase so far this year; looking ahead, policymakers are predicted to raise rates again twice this year and three times next year. The Dow Jones Industrial Average Index fell by 0.6% during June.

Pressure on the UK intensified to resolve Brexit. European Council President Donald Tusk urged the UK to “lay the cards on the table”, cautioning that the most difficult issues remain unresolved and progress is vital in order for both sides to reach agreement by October. Bank of England (BoE) Governor Mark Carney highlighted the UK’s “rock solid solution” to a “disorderly Brexit” but said he was still awaiting Europe’s input, warning the issue could not be resolved by the private sector.

Although BoE policymakers left the base rate unchanged at their June meeting, the likelihood of an increase at their August meeting has increased. Three members of the nine-strong Monetary Policy Committee (MPC) voted to raise rates from 0.5% to 0.75%. The FTSE 100 Index fell by 0.5% during June, having reached a new all-time high of 7877 points during May.

Meanwhile, political turmoil in Italy undermined investors’ confidence, not only in Europe but around the world, as the country found itself unable to form a coalition government in the wake of March’s General Election. Share prices fell sharply during May until, at the very end of the month, Giuseppe Conte was announced as the new Prime Minister. Looking ahead, however, the future remains clouded and persistent concerns remain over Italy’s fiscal position.

Credit ratings agency Moody’s affirmed France’s “Aa2” credit rating and upgraded its outlook from “stable” to “positive”. Moody’s cited the French government’s “ambitious and wide-ranging reform programme”, its “commitment to fiscal consolidation”, and France’s large and wealthy economic base and strong institutions, but also highlighted the country’s high debt burden.

The eurozone’s economic growth slowed during the first quarter of 2018. The region’s economy expanded at a quarterly rate of 0.4% during the first three months of 2018, compared with a rate of 0.7% during the previous quarter. On an annualised basis, the eurozone grew at an annualised rate of 2.5%. Elsewhere, the region’s rate of inflation is expected to have risen from 1.2% year on year in April to 1.9% in May, bringing it closer to the European Central Bank’s target rate.

Japan’s economy contracted at an annualised rate of 0.6% during the first three months of 2018, curbed by a slowdown in domestic consumption. On a quarterly basis, the economy contracted by 0.2%, having grown by 0.1% in the fourth quarter of 2017. Having slowed in March, core consumer inflation continued to lose momentum in April. Core consumer prices rose at an annualised rate of 0.7% during April, following an increase of 0.9% in March. This is still well below the Bank of Japan’s (BoJ’s) “price stability target” of 2%.

Closer to home, the economies of Northern Ireland and the Republic of Ireland are forecast to add almost 240,000 jobs over the next five years.The prediction comes in a report from Neil Gibson, chief economist at the consultancy EY. His forecast also suggests that more than 90% of those additional jobs will be in the Republic of Ireland.

Both economies have had impressive labour market performances recently with the unemployment rate in Northern Ireland reaching a record low of 3.1%. However, figures for “economic inactivity” in NI are still the highest in the UK.

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