Please find below our Weekly Market Update for the week ending 15th June 2018.
A brief insight into the latest market dynamics and details of any changes occurring within our model portfolios.
As I’m sure you’ve already heard, US & North Korea leaders Donald Trump and Kim Jong-Un engaged in a historic summit on Tuesday, on the island of Sentosa, Singapore. The four-hour meeting was the first ever between a North Korean and American leader, and while the two Heads of State hailed the talks as a step towards a ‘bright future’, analysts were more sceptical. Despite Kim announcing he was going to halt his nuclear programme, there were no concrete details on the time frame for nuclearization, and to add a little context – North Korea has announced deals to halt nuclearization in 1994, 2005 and 2008; all retracted within two years as they were found to have betrayed the agreement. There were also no plans to lift economic sanctions on North Korea, although this is likely to happen if Kim appears to follow through on the denuclearization of his country.
Overall, the summit is being perceived by many to be more symbolic rather than practical, hardly surprising for the two leaders known for their self-gratifying nature, and markets responded accordingly by being relatively undisturbed. The US Nasdaq Composite closed Tuesday on a record high of 7,704, having risen 0.6% following on from the summit, while the S&P 500 rose 0.2%. In Seoul, the capital of South Korea, the Kospi index slipped 0.1%, but is still up almost 3% from its May low.
Monetary Policy has already been a big influence on markets in 2018 and is expected to be for the remainder of the year at least, as central banks look to put an end to quantitative easing. It has played a big part in this week’s news too as the US Federal Reserve raised interest rates on Wednesday by 25 basis points, as was expected, and signalled two further increases this year – one more than it had previously forecast. The Fed’s updated projections also included lifting estimates for GDP growth and later on in the year, inflation. The dollar initially rallied after the announcement but subsequently gave back its gains, while US equities ‘see-sawed’ before ending lower. In New York, the S&P 500 closed 0.4% weaker at 2,775, close to the day’s low, while the Dow Jones Industrial Average shed 0.5%. Furthermore, just as I write this, the European Central Bank (ECB) has released a post-policy meeting statement stating it will begin plans to end its asset purchase programme (also known as quantitative easing) at the end of 2018. The ECB will taper the asset purchases from €30bn in September, to €15bn in October and eventually ending the purchases in December. The shared currency, the euro, shot up following the news by 0.5%, before dropping significantly 0.9% to $1.1725 as the cautious elements in the ECB’s approach dominate reaction. The tightening of monetary policy by the US and EU highlights the underlying strength of their economies, as the two developed nations aim to maintain steady long-term growth.
Gary’s market comments in conjunction with our investment partners
Although the thought of ending QE frightens some investors, many remember the positive reaction when markets went up as central banks were pumping money in, so it is not hard to imagine what they believe will happen when the central banks start extracting money from the market. However, the situation is not as ugly. The market and the central bank still believe in 2% inflation over the medium term due to many factors, most importantly improving wage growth.
The team has taken profits on their US small cap exposure in the Russell 2000 index after outperformance of 5%, versus the large cap S&P500 over the year so far. The position was originally put in place just after the US Presidential election in November 2016, given Trump had talked about tax cuts and deregulation in his campaign platform.
Sources: LGT Vestra and 7IM