Market update – September 2017

Traditionally, August is supposed to be a relatively quiet month for financial markets. Investor sentiment in August 2017, however, was undermined by terrorist atrocities in Barcelona, and by an increasingly combative rhetoric from North Korea that culminated in the firing of a missile over Japan. Concerns over the deteriorating relationship between North Korea and the international community led to heightened demand for perceived “safe-haven” assets during the month; the price of gold surged to an eleven-month high and reached its highest level since President Trump’s election in November 2016.

In the US, President Trump’s relationship with the US business community deteriorated during August as high-profile company leaders deserted his Manufacturing Council in the wake of unrest in Charlottesville, Virginia. The US economy expanded at an annualised rate of 3% during the second quarter of 2017, compared with an earlier growth estimate of 2.6%. The Dow Jones Industrial Average Index edged 0.3% higher over August as a whole.

In a move that was construed as a sign of confidence in the US economy, the Federal Reserve (Fed) indicated that it is ready to begin cutting back its balance sheet, perhaps as early as policymakers’ next meeting in September. The Federal Open Market Committee (FOMC) maintained its key interest rate at 1% to 1.25% at its July meeting, but announced that it intends to begin trimming its balance sheet “relatively soon” if the US economy remains on target.

Uncertainties surrounding Brexit are hampering the UK’s economic growth, business investment, and wage growth, according to Governor of the Bank of England Mark Carney. Meanwhile, at the latest round of Brexit negotiations, EU Brexit negotiator Michel Barnier complained of a lack of “decisive progress”. The FTSE 100 Index rose by 0.8% during August.

The UK economy posted quarterly growth of 0.3% for the second quarter of the year, compared with first-quarter growth of 0.2%. Growth in the services sector was boosted by a strong contribution from the UK retailing and film industries. The International Monetary Fund (IMF) downgraded its forecast for UK economic growth in 2017 from 2% to 1.7%, citing “weaker-than-expected activity” in the first quarter.

The rate of unemployment in the UK fell to its lowest level since 1975 in the three months to May, declining to 4.5%. However, wage growth continued to lag inflation: average earnings (excluding bonuses) rose at an annualised rate of 2%. Moreover, once inflation was stripped out, real weekly wages fell at an annualised rate of 0.5%, stoking concerns about the possible impact on economic growth.

The euro rose to its highest level against the US dollar since January 2015 during August, driven up by concerns over the impact of Tropical Storm Harvey in the US, and by the strengthening European economy. The eurozone’s economy expanded at an annualised rate of 2.2% during the second quarter. The euro’s appreciation generated some apprehension about the impact on corporate earnings in the region. Over August, the Dax Index fell by 0.5%, while the CAC 40 Index edged 0.2% lower.

The eurozone’s rate of unemployment fell to 9.1% during June, reaching its lowest level since February 2009. The IMF expects economic expansion in the eurozone to be stronger than previously predicted, and upgraded its forecast for 2017 from 1.7% to 1.9%, citing better-than-expected momentum in domestic demand. The IMF also upgraded its economic forecasts for several major European countries, including Spain – which is expected to expand this year by 3.1% – and Italy, which is forecast to grow by 1.3%.

Japan’s economy notched up six consecutive quarters of positive expansion, posting unexpectedly strong annualised second-quarter growth of 4%. The country’s economy grew by 1.5% in the first three months of the year. During August, the Nikkei 225 Index fell by 1.4% as large exporters bore the brunt of a stronger yen.

Closer to home, the latest official figures show that the Northern Ireland economy grew by 0.3% in the first quarter of 2017. Output is measured using the Northern Ireland Composite Economic Index (NICEI), which is roughly equivalent to Gross Domestic Product (GDP).

The quarterly expansion was slightly higher than UK GDP growth in the same period. On an annual basis growth was estimated at 2.4%, above the UK rate of 2%.

The Republic of Ireland, which is Northern Ireland’s single biggest export market, is continuing to experience a robust economic recovery. Unemployment is at lowest levels since the summer of 2008 and the country’s central bank is forecasting economic growth of 4.5% this year and 3.6% in 2018.

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