Market Update - October 2017
The European Union have stated that there would have to be a “miracle” to allow the UK Government to unlock the next stage of the Brexit talks by the end of the October whilst David Davis, the UK’s Brexit minister claimed that there had been ‘decisive steps taken forward.’ Central banks also released statements on their latest outlook on inflation, economic growth and how they will adjust monetary policy accordingly.
Parliament has now returned from summer recess and with this brings the topic of Brexit back to the forefront of the UK agenda. We saw the Prime Minister deliver her keynote speech in Florence where more details of the UK Government’s plan were elaborated. The most significant statement was the discussion of a transition period. During this time - the prime minister suggested two years as a possibility - all of our EU commitments and law will remain the same. This suggests that any payments into the EU budget, free movement of people and the jurisdiction of the European Court of Justice would stay in place. Political analysts have argued that this is a win for the Chancellor, Philip Hammond, who has pushed for a transitional period. Hammond has previously stated that he does not wish for a “cliff edge” Brexit and to keep the UK economy stable it is important that the UK slowly eases its commitments/grants away from the European Union.
The European Union are naturally exhibiting a stubbornness to any suggestions of progress made in the Brexit talks. It is in the self-interest of the remaining 27 states to keep the Union stabilised by avoiding an advantageous deal with the UK. With the rise of populism, European leaders, do not want to give any inclination that a nation can leave the single market and still receive the benefits of being a European Union member. This is why we are likely to see this ongoing tug of war between the UK Government who want to be perceived as the negotiators leading the debate and the European Union who aim to defend the principles of which the political and economic union was built on.
The Bank of England still continues to hold interest rates at the record low of 0.25%. Mark Carney, the Governor of the Bank of England, has suggested that Brexit uncertainty is hurting investment in the UK which is therefore dampening the supply and demand of business in the economy. Consumer borrowing is also at its highest level since 2008 and therefore any rate rise could have a drastic effect on debt levels. Despite this, inflation is now at 2.9% its highest level in four years which means that British households are still facing a cost of living squeeze, as wages are currently rising by around 2.1%. The Bank of England’s target inflation rate is 2% and there is some pressure to combat this higher inflationary environment the UK is currently experiencing.
Mark Carney has explicitly stated that interest rates will rise in the “relatively near term”. Last month, the Monetary Policy Committee voted 7-2 against a rate hike but signalled that unless there is a sudden string of bad economic data “some withdrawal of monetary stimulus is likely to be appropriate over the coming months”. The next opportunity for a rate rise is on the 2 November and if UK economic data continues on a positive trajectory then we could see the bank base rate move from 0.25% to 0.5%.
Donald Trump is still looking for his first legislative win as President. Gary Cohn, the head of the White House national economic council, has suggested that the first victory will be in the form of tax reform which the administration will aim to push through later this year. This has been a keystone of Trump’s political and economic agenda and will test whether he will be able to achieve some of the mandate he was elected on.
The President has now given further details on his vision of US tax reforms. American companies would see their tax rate cut to below what many of their competing corporations pay elsewhere under a sweeping plan that aims to slash the corporate tax to 20% down from 35% and largely end the taxation of non-US earnings. For companies, the average top corporate tax rate worldwide is 22.5%. The proposed new US rate would come in below France’s 34%, Australia’s 30% and Japan’s 23% corporation tax rate. Gary Cohn is still adamant that the tax reforms can be pushed through at by the end of the year.
Federal reserve chair, Janet Yellen, has stated that the uncertainty over inflation will not derail projected interest rate rises. US economic performance has continued to be good and the labour market has strengthened. These signs of a global upswing have helped spur the Fed to lift rates twice this year and prepare to pull back its quantitative easing programme, as falling unemployment and steady growth reduce the need for emergency levels of monetary support.
North Korea has heightened the instability in this region as the number of missile tests has increased in recent months. The latest launch was a hydrogen bomb test which illustrates the increasing success of the regime’s nuclear programme. This has seriously tested the resolve of the US and allied Asian nations. North Korea has always portrayed a threatening military brashness when interacting with any nation they believe is an enemy of their regime. The additional factor which now adds to the unpredictability of the situation is a US President who is also erratic in nature and is not afraid to use military might to defend national security. Despite these factors it still seems suicidal for the North Korean regime to actively instigate a direct attack on the US or any surrounding nations. In the meantime, it is now up to China, North Korea’s most important ally, biggest trading partner and main source of food and energy to apply the necessary pressure on Kim Jong-Un’s regime.
Shinzo Abe, the Japanese Prime Minister, has called a snap general election that will decide whether Japan sustains its massive economic stimulus and shape the country’s future. The election is expected to take place later this month and all signs point to Abe being re-elected. Mr Abe’s platform of raising taxes to spend on the young suggests he will fight a populist campaign, aimed at exploiting a weak opposition. An average of polls suggest that Mr Abe’s party is supported by 44% of voters, with the opposition Democratic party on 8% and the Party of Hope also on 8%.
Monitoring the US situation and tensions with North Korea will be a key driver of market conditions. If Trump can push through his tax reforms then this is likely to be beneficial for US corporations.