A brief insight into the latest market dynamics and details of any changes occurring within our model portfolios.
Market data
Interest rates on hold still
The Bank of England decided to keep the record low interest rates on hold at their August meeting for the 120th time, with just two of the rate setters voting in favour of a hike this month, versus the three that voted for a June rate rise.
The decision was in line with market consensus forecasts and due to the Bank downgrading its UK GDP growth forecast to 1.7%, 0.2% lower than the 1.9% previous forecast. Inflation is also predicted to have a bigger impact, with it expected to peak in October at 3% and last longer. Commenting on the decision, Mark Carney, the Bank’s Governor, stated that he expected that there would need to be some tightening of the monetary policy over the next three years, with two rate rises likely to be sufficient.
European economy on track
The eurozone’s economy expanded by 0.6% in Q2 2017; up from 0.5% in Q1 and up 2.1% compared with a year earlier. It represents the fastest growth since 2011.
Headline eurozone inflation meanwhile held steady at 1.3% in July comfortably below the European Central Bank’s target of just below 2%, although core inflation rose slightly to a four-year high of 1.3% versus the 1.2% from the month earlier.
The eurozone composite PMI eased slightly in July, falling to 55.7 from 56.3 in June, with the strongest expansion in Ireland and Spain, followed by Italy, France and Germany.
Gary’s market comments in conjunction with our investment partners
When the US dollar is cheap it effectively acts as a form of loose monetary policy, and vice versa when the US dollar rises. Recent weakness in the US dollar has been beneficial particularly in emerging markets which has been the best performing sector year-to-date.
Conversely, the euro has experienced an upswing in sentiment. The eurozone economy has been showing signs of genuine recovery and fundamental improvement in economic data. The strength of the euro, as the world’s second biggest currency, has also had a negative impact on the value of the dollar.
LGT Vestra don’t take short term currency positions in the model portfolios and Volare multi-asset funds. This is not to say they don’t hedge currencies. They have a hedged position on the euro for the European equity holding which was put on before Brexit to remove the currency risk from the trade. This was done with an eye on European and UK political instability.
The hedged position has hurt performance over recent weeks, however, the direction of travel for the euro from here is uncertain and we would want to have clear rationale to remove the hedge at these levels.
In the US, a soft inflation number mid-way through July put doubts in investors’ minds about the health of the economy.
The disappointing Consumer Price Index (CPI) reading of 1.6% meant that the CPI reading has now missed consensus expectations on the last four occasions. A September rate rise by the Federal Reserve is now looking less likely, although the markets are still expecting a rise before the year is out.
Aside from inflation missing expectations, Trump continues to disappoint on the reform front. His efforts to replace Obamacare have come to naught and his infrastructure spending and tax cuts have not enjoyed any progress. As a result, the US dollar was one of the poorest performing currencies in July, with the trade weighted dollar falling by nearly 3.5% against major currencies.
7IM have zero exposure to the dollar in our portfolios.
Sources: LGT Vestra and 7IM
