Market Overview June 2018
Last month, we saw a bout of market volatility as Italy struggled to form a coalition government which caused geopolitical concerns for investors. Italy’s president, Sergio Mattarella, has now approved a populist government which has temporarily ended the political crisis. In the US, Donald Trump instigated the steel and aluminium tariffs he announced in March which has caused trading tensions with the European Union, Canada and Mexico.
Europe has been the centre of political tension recently. Whilst, the European Union has been focusing their efforts on negotiating the various complexities of Brexit, they have been casting an eye on two of the largest economies on the continent, Italy and Spain. In December last year, the Italian president, Sergio Mattarella, dissolved parliament which gave way for a snap election called for 4th March 2018. This was the first vote based on the new electoral system (Rosatellum) that was ratified last year. Italian politicians demanded this new system mainly to increase the probability of one party achieving a majority of parliamentary seats. Despite this, the result produced a political deadlock with no party achieving a clear majority. The final vote resulted in a hung parliament and a period of tense negotiations lead by Sergio Mattarella to begin the foundations of a new government. These political tensions were only resolved in the latter part of May as the president agreed the forming of a populist unity between the Five Star Movement and the far-right League. This gave investors some respite with markets breathing a sigh of relief after a long period of political negotiations. However, questions will be raised regarding the stability of this government and whether another election will be called to attempt to form a majority.
Spain has also had their political concerns as Mariano Rajoy, the prime minister of Spain, conceded defeat after the opposition Socialist party secured enough support to force him out with a vote of no-confidence. It no doubt adds to a sense of political drift in Europe after three months without a government in Italy following their election in March. The question many are asking is whether there should be as much concern regarding this political uncertainty as investors experienced with Italy. Economic and political analysts have suggested that Spain is in a different economic situation to Italy, having cleansed its banking sector and implemented some practical reforms. Spanish economic growth is also one of the strongest in the Eurozone. The politic situation is also very different. The alternative to Rajoy’s government is the Socialists who are centre-left and pro-European, compared with the more extreme alternatives in Italy. The Socialists would also be a minority government making drastic policy shifts unlikely. As a result, the outcome of this political uncertainty should be muted as it does not harness any large political change.
The US has fired the opening shot in a trade war with three of their biggest trading partners by deciding to begin levying tariffs on imports of steel and aluminium from the European Union, Canada and Mexico. This move against longstanding US allies on national security grounds sets the stage for a round of tariffs among some of the world’s largest economies. The EU has stated it would retaliate against any US tariffs and Jean-Claude Juncker, the European Commission president, declared that the bloc would go ahead with a campaign to impose its own duties on US products such as bourbon, motorcycles and peanut butter. Many have argued that Trump is simply displaying his own negotiating skills to force his allies into producing a more favourable trade arrangement. The US says it is still open to negotiation over its steel tariffs, so long as those on the other side of the table make concessions. This rhetoric is likely to continue until a mutual arrangement can be determined by all parties.
Positive economic growth evident across major economies is allowing the Federal Reserve in the United States to begin tightening some of the monetary policy endorsed immediately after the global financial crisis. The growing economies have led to fuller labour markets which could push up salaries. Rising wages could result in higher inflation and, in turn, a faster pace of short-term interest rate increases by central banks. This retreat of monetary policy by central banks led some investors to begin profit taking as they believed companies could not sustain their growth without the cheap and easy money they could obtain from central banks. However, the positives of a more stringent monetary policy from central banks is that it demonstrates that economies are growing and this is positive for the earnings growth of corporations.
Theresa May has announced plans to publish a Brexit white paper ahead of a key European Council meeting later this month, setting out in detail what Britain is seeking from its future relationship with the European Union. The white paper will cover issues including customs, regulatory divergence and the financial services sector. It will also examine a future security relationship. It will feed into negotiations with Brussels on a political declaration on the future UK-EU relationship, which is scheduled to be agreed by October. The summit taking place on 28-29th June will be the next stage of what has been an uncertain negotiation period so far.
Onto economic factors, and the likelihood of an imminent interest rate rise by the Bank of England is now looking less probable. UK economic growth unexpectedly fell to its slowest rate in five years after the Office for National Statistics stated that its first estimate of GDP growth for the first quarter of 2018 was just 0.1%. The consensus forecast among UK economic analysts was for growth of 0.3%. It will be interesting to see whether the economy can bounce back when the second quarter figures are released next month.
We have seen a long and unusual path of fiery rhetoric and peaceful dialogue between the North Korean regime and the US over the past month. The world saw Kim Jong Un cross the South Korean border to greet the South Korean president Moon Jae-in and the dismantling of the infamous nuclear test site at Punggye-ri. All of these signs looked as if a peaceful settlement would be reached, that was until US National Security Advisor John Bolton suggested that the North Korean denuclearization could follow the example of Libya where the leader was deposed and executed. This reinstated tensions and Donald Trump then cancelled the summit set for June 12. In a turnaround of events, North Korea have now stated their intention to meet and the summit may still take place. A peaceful conclusion will be positive for world markets and investors are hopeful of this outcome.
It will be interesting to see the outcome of the UK’s economic growth figures released in July.
Trump’s potential trade war/negotiations will play a part in market movements.
The ongoing Brexit negotiations will continually be at the forefront of investor’s minds until a trade deal has been granted.
Please note: The opinions expressed in this update are those of A&J Wealth Management Limited only, as at the date stated above, and are subject to change. The update is for information purposes only. Source: Financial Times