Market update – September 2018

Amid mounting fears that the UK might have to exit the EU without a deal, the pound wobbled during August, dipping below US$1.27 against the US dollar for the first time in over a year. The FTSE 100 Index fell by 4.1% during August, while the FTSE 250 Index declined by 0.9%.

UK economic growth picked up from 0.2% in the first quarter of 2018 to 0.4% in the second quarter. The Bank of England (BoE) raised base rate by 0.25% to 0.75% during August, taking its key interest rate to its highest level since March 2009. Further increases are widely expected, although these are expected to be both “gradual” and “limited”. Meanwhile, Chancellor of the Exchequer Philip Hammond warned that a no-deal Brexit could reduce UK economic growth by 7.7% over 15 years.

European markets were affected not only by concerns over unresolved trade tensions and Brexit, but also by worries about Italy’s high level of public debt. Germany’s Dax Index dropped by 4.3% during August, while France’s CAC 40 Index fell by 1.9%. Economic growth in the eurozone rose more rapidly than originally calculated during the second quarter, according to the European Commission (EC), rising by 0.4%. Greece’s controversial bailout programme finally came to an end on 20 August: after eight years, Greece’s financial sector is judged to have been strengthened by recapitalisation operations and a revamp of bank governance. Over the month, the Athens Composite Index fell by 4.2%.

The US reached a new agreement with Mexico on the North American Free Trade Agreement (Nafta), but negotiations with Canada remained unresolved as August drew to a close. Elsewhere, tensions – and tariffs – rose between the US and Turkey, the US/China trade dispute rumbled on, and trade discussions between the US and China ended without making substantial progress. China imposed tariffs of 25% on US$16 billion-worth of US imports following the US’s imposition of tariffs on US$16 billion-worth of Chinese goods.

Equity market performance in the US during August was underpinned by strong corporate earnings and sales. The S&P 500 Index achieved its longest bull market in history, superseding the previous record of 3,452 days that was set during the technology boom of the early noughties. Over August as a whole, the S&P 500 Index rose by 3% while the Dow Jones Industrial Average Index climbed by 2.2%. Meanwhile, the technology-rich Nasdaq Index rose by 5.7%, and Apple’s market value topped US$1 trillion during the month.

Emerging markets generally fell during August, undermined by an increasingly hawkish US central bank, a strengthening US dollar, and unease over escalating trade tensions. The Turkish lira plunged against the US dollar and, as the relationship between Turkey and the US continued to deteriorate, President Trump doubled US tariffs on imports of Turkish steel and aluminium to 50% and 20% respectively. Turkey responded by increasing levies on US imports.

Turkey’s experiences underline the vulnerability of some emerging countries to rising debt costs, according to ratings agency Moody’s, which found that the economies that have recently been most hurt by weakening exchange rates, wider risk premia and lower capital inflows also tend to have current account and budget deficits. Moody’s found that Argentina, Russia, Brazil and South Africa have experienced the highest level of currency depreciation against the US dollar so far in 2018.

Closer to home, The CBI director in Northern Ireland, Angela McGowan, has warned the region “looks to be on the brink of recessionary territory” after official figures showed the economy shrank in the first three months of 2018.The figures showed a contraction of 0.3% compared to the previous quarter, driven by a fall in construction sector output.

The statistics are measured using the Northern Ireland Composite Economic Index (NICEI), which is roughly equivalent to Gross Domestic Product (GDP). Although the sources are not fully comparable, the results show that the UK economy has been growing at a faster pace than Northern Ireland; annual growth of 1.2% in the UK compared with -1.0% in NI. The decline in the NI figure was mainly due to the manufacturing sector, which was badly affected by the ending of production at the JTI and Michelin factories in Ballymena.

However, the total number of people in work has never been higher and the unemployment rate of 3.5% is close to record lows, suggesting that Northern Ireland’s long term problem with weak productivity is continuing. The “economic inactivity rate” (working-age people who are not working and not seeking or available to work) in Northern Ireland stands at 27.5%, compared to a UK rate of 21%.

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