A brief insight into the latest market dynamics and details of any changes occurring within our model portfolios.
The big news of the week is that the Bank of England has reached a decision to raise interest rates for the first time since July 2007, from 0.25% to 0.5%, in order to help counter inflation. The verdict reverses the rate cut in August last year – made in the wake of the Brexit referendum. The Monetary Policy Committee said the decision to leave the EU is having a ‘noticeable impact’ on the economic outlook, saying there were ‘Brexit-related constraints’ which are holding back the UK’s potential growth rate. Following on from the decision, almost 4 million households across the UK will face higher mortgage payments, but it should give savers a modest lift on their returns. With household debt rising five times faster than earnings, this will be an encouragement to savers whilst at the same time discouraging borrowers.
The Eurozone economy exceeded expectations this week by announcing that GDP growth was up by 0.6% for the 3rd quarter, with the overall growth rate for the past 12 months being 2.5%. This has exceeded expectations as only last month the ECB announced its growth forecast for 2017 as 2.2%, which was its highest figure for 10 years. Accompanying this was the revelation that Eurozone unemployment was 8.9% in October, which is its lowest rate for nearly 9 years. These figures, along with that fact that the political turmoil in Spain has had little effect on the markets, reinforce the notion that the Eurozone is, at last, gaining some economic strength.
Tech stocks continue to drive US growth, with annualised growth in Q3 reaching 3.0% versus the expected 2.6%. The Dow Jones and NASDAQ composite continue to hit record highs, rising 0.5% and 1.1% this week respectively. US stocks in technology rose by $190bn during the week, which is more than the entire GDP of New Zealand. This has been facilitated by continually poor inflation figures in the USA meaning interest rates have remained low, which creates an ideal environment for big business.
Gary’s market comments in conjunction with our investment partners
LGT Vestra believe that there are too many uncertainties for the Bank of England and for the market participants to be sure that the UK is entering into a tightening cycle, rather than just reducing existing stimulus. The reason for this is that a quick rate rise runs the risk of restraining growth at a time when economic activity is not high and political uncertainty looms. LGT Vestra still see the Bank of England raising interest rates at a slow and steady pace during the next few years.
7IM’s holding in European equities performed well last week on the back of the positive market moves, with the EuroStoxx 50 up 1.31% on the week. The news of the ECB announcement of ’The beginning of the end’ to the Central Bank’s QE programme –but in a careful and considered manner – was well received given President Mario Draghi has been cautious in his approach so as not to hinder growth, and since the bank’s 2% inflation target hasn’t been reached despite €2tn in purchases.
Sources: LGT Vestra and 7IM