FMB Technical Briefing - Autumn Invesment Update, how is the market performing?

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In our latest monthly investment update for September 2018, we look at how investment markets, global economy and commodity prices are performing.

The FTSE 100 index of leading UK company shares finished August at 7,432.42 points, down from 7,748.76 points at the end of July. This represents a fall of 316.34 points or 4.08% during the month.

The fall in the value of the index during August was driven primarily by anxiety surrounding speculation the UK could leave the Europe Union with no trade deal in place. Fears that the economic crisis in Turkey could spread to other emerging market economies also contributed to poor investor sentiment.

Pound sterling fell to a nine-month low against the euro in August as well as losing ground to the Swiss Franc, the Yen and the US Dollar.

The fall in sterling comes despite the increase in interest rates last month which usually strengthens the value of a currency. The decrease resulted from continued uncertainty over Brexit with Bank of England governor Mark Carney saying the chances of a no-deal Brexit were "uncomfortably high".

The Office of National Statistics (ONS) released data in August showing that UK economic growth had picked up in the three months to June. Growth of 0.4% was reported, double the 0.2% growth rate reported in the first quarter of 2018.

The head of national accounts at the ONS, Rob Kent-Smith, noted that retail sales and construction were boosted by good weather but warned, "However, manufacturing continued to fall back from its high point at the end of last year and underlying growth remained modest by historical standards.”

Data from the latest IHS Markit/CIPS UK manufacturing Purchasing Managers’ Index (PMI) shows the rate of expansion declined again in August, with the rate decreasing slightly from 53.8 in July to 52.8. An index reading above 50 indicates expansion. The slowdown in manufacturing output comes off the back of continued slower rates of expansion in both output and new orders.

The index remains above its long-run average of 51.8 but has been falling steadily from the heights seen at the start of the year.

Discussing the outlook for UK manufacturing, Duncan Brook, Group Director at the Chartered Institute of Procurement & Supply, expressed his concerns saying, “With a subdued global economy threatened by escalating trade wars and Brexit uncertainty making its mark, it’s unclear where future opportunities to sustain the health of the sector will come from.”

In Europe, Greece completed its EU bailout period and returned to the international bond markets. The country's Debt Management Agency announced plans to sell bonds that will be repaid in five years. It is the first sale of government debt since 2014, when Greece made a brief return to the markets.

Many observers think Italy, the EUs third largest economy, may be the cause of the next European debt crisis. Italian finances are stretched by a large public sector - government borrowing stands at 130 per cent of GDP - and bond yields have been rising, a sign of low confidence by financial markets which will make it more difficult for Rome to raise money by selling long-term sovereign debt.

The spectacular collapse of a bridge in Genoa on 14th August, which killed 43 people, highlights longstanding deficits in infrastructure spending in the country.

In the US, economic growth for the second quarter has been revised up to from 4.1% to 4.2%, the highest quarterly growth figure for almost four years. This also keeps the US economy on track to meet President Trump’s annual growth target of 3% for the year.

The positive growth figures helped US stock markets reach new highs during August. The S&P 500 and the Nasdaq indexes both hit new record highs for the fourth consecutive session, boosted by gains for technology companies such as Amazon and Alphabet.

President Trump also announced trade sanctions on Turkey which would see levies on aluminium and steel exports from Turkey of up to 20% and 50%, respectively.

In Turkey, the country’s currency, the lira, has fallen sharply as a result of Trump’s levies as well as concerns over the underlying problems faced by the Turkish economy.

Klaus Bockstaller, Head of Global Emerging Markets for Pictet Asset Management, commentated that “Turkey's government has backed itself into a position where it faces unenviable policy alternatives. Investors are watching closely… The best and most positive for markets would be for the Turkish central bank to raise interest rates sharply.”

A deputy governor of Turkey’s central bank has stepped down from his role two weeks before a critical interest rate decision, which has not helped matters.

Erkan Kilimci, sat on the Monetary Policy Committee for the Turkish central bank. The committee is facing calls to announce a radical rate rise when it next meets on 13th September to bolster the plunging lira.

Investors are concerned that the turmoil in Turkey will spread to other emerging market economies. Argentina are now also contributing to these fears as the Argentine peso dropped against the US dollar to a level which took it almost 50% lower than it was at the start of the year.

Argentina’s central bank increased interest rates by 15% up to 60% in an effort to steady the currency. This coincides with the country’s president, Mauricio Macri, asking the International Monetary Fund (IMF) for the early release of a $50 billion loan.

Meanwhile in Japan, the economy rebounded in the second quarter reporting growth of 1.9%, despite growing global trade tensions.

The growth rate, well ahead of the country’s long-run trend, suggests the Japanese economy is still in a phase of sustained economic expansion despite deepening labour shortages and the threat of a global trade war.

Returning to the UK, there was conflicting house price data released from two of the UK’s largest mortgage lenders during August. Halifax reported that annual house prices rose at a rate of 3.3% in July taking average house prices to a new record of £230,280 with a rise in July alone of 1.4%

Meanwhile, Nationwide reported an increase in house prices during July of 0.7%, half the rate reported by Halifax.

The data from Nationwide for August also revealed that house prices fell by 0.5% in August which was the biggest month-on-month decline in six years.

Commenting on the outlook for house prices in the UK, Robert Gardner, Nationwide’s Chief Economist, said “Looking further ahead, much will depend on how broader economic conditions evolve, especially in the labour market, but also with respect to interest rates.”
The benchmark 10 year UK Gilt yield ended August at 1.28%, a small decrease from 1.35% at the end of July.

£1 currently buys $1.2917 or €1.1126. The Forex Gold Index is $1,202.45/oz and the Silver Index is $14.53/oz. Brent Crude Oil Spot is currently $74.41/barrel.

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