MARKET UPDATE: UK SET FOR RATE RISE AS TRUMP TEASES ON FED CHAIR CHOICE

MARKET UPDATE: UK SET FOR RATE RISE AS TRUMP TEASES ON FED CHAIR CHOICE

30th October 2017

LAST WEEK – KEY TAkeAWAYs

ECB outlines plans to ease off stimulus

The European Central Bank (ECB) announced it is to halve the amount of bond assets it buys every month from €60bn to €30bn from January next year. The programme could then potentially end in September 2018 “or beyond, if necessary”. The key interest rate for eurozone countries remains unchanged at 0%, with a deposit rate at -0.4%, and this is unlikely to be raised any time soon with inflation still well below the ECB’s target of 2%. With firm guidance and a continuation of so-called ‘ultra-loose’ monetary conditions, this will be welcome news for most European companies.

Catalonia declares independence from Spain

Catalonia declared independence from Spain, following a vote by the regional parliament on Friday. Seventy Catalan deputies voted for independence, with 10 opposed and two blank ballot slips. Madrid reacted by stripping the region of its autonomy and by removing Catalan leader Carles Puigdemont from office, and calling elections for December. Markets have been largely unfazed by the stand-off between Madrid and a region that accounts for 20% of the Spanish economy, viewing Catalonia’s bid for independence as unlikely. Omnis funds currently have little exposure to Spanish equity and debt.

Xi Jinping’s support act takes the stage in China

China’s Communist party has revealed the group of seven leaders, the Politburo Standing Committee, who will serve under president Xi Jinping in his second term. The six members of the committee (in addition to Xi), all too old to succeed the president in five years’ time, was widely interpreted as his way of shoring up his grip on power for many years to come. This follows the enshrining of ‘Xi Jinping Thought’ into China’s constitution (see Market Update, 23/10/17).

Small rise in UK economic growth

The UK economy grew by 0.4% in the third quarter of the year, a small rise from the 0.3% achieved in the second quarter. The gross domestic product (GDP) figure beat City forecasts as an expansion in manufacturing and services offset a contraction in construction. Although growth remains marginal, it is unlikely to be a barrier to the Bank of England’s Monetary Policy Committee (MPC) in raising interest rates at its November meeting this week.

Looking ahead - TALKING POINTS

Bank of England set to raise rates?

The Bank of England’s Monetary Policy Committee (MPC) is widely expected to raise UK interest rates when it meets this week, reversing a cut it made it made immediately following last year’s EU referendum. The Brexit vote has thus far failed to plunge the UK into recession, as some had predicted, but the economy is growing at a much slower rate than many other European countries and the US.

The Bank is expected to increase interest rates from 0.25% to 0.5%, which would represent the first rise since July 2007, when rates increased to 5.75%. Could we reach such, relatively, lofty heights again? It seems unlikely for the time being. The Bank must tread carefully given an apparent housing market slowdown and depressed wage growth across the UK with any increase in borrowing likely to hurt already squeezed households. 

UK interest rates since 1997 (%)

UK Base Rates

Source: Bloomberg

Trump to announce new Fed chair

President Trump has indicated that he will this week name the person he wants to lead the US central bank, the Federal Reserve. The term of current chair Janet Yellen expires in February, and it seems unlikely that she will be granted another four years at the helm. Trump has been critical of Yellen in the past, particularly during his presidential campaign when he accused her of making policy decisions aimed at earning political points for outgoing president Barak Obama.

Trump teased his decision on social media on Friday, stating that everybody would be “very impressed” with his nominee who would hopefully do a “fantastic job”. Current Fed governor Jerome “Jay” Powell is considered the front-runner for the job, and he is likely to be up against John Taylor, a Stanford economist with a more radical agenda to shake up monetary policy. A Powell victory would be more likely be welcomed by markets, while Taylor is more hawkish (favouring higher interest rates to keep inflation in check).  

US inflation – 5 years

 Rsz _1united -states -inflation -cpi _1

Source: TradingEconomics.com

THE OMNIS VIEW

Through a well-diversified approach to asset allocation, the Omnis investment team aims to defend and grow the value of your portfolio through market cycles. While the ECB’s decision to begin to ‘taper’ quantitative easing has been initially welcomed by investors, it remains highly unlikely it will raise interest rates anytime soon.

The Bank of England looks set to raise rates for the first time in a decade before the end of this year, while the Fed is already someway down this path having initiated its first post-crisis hike back in 2015. This just goes to show how disconnected some of the world’s central banks are, which is one of the reasons why it is appealing to use active investors who can pick and choose the best opportunities as and when they present themselves.

 

The Omnis Managed Investments ICVC and the Omnis Portfolio Investments ICVC are authorised Investment Companies with Variable Capital. The authorised corporate director of the Omnis Managed Investments ICVC and the Omnis Portfolio Investments ICVC is Omnis Investments Limited (Registered Address:  Washington House, Lydiard Fields, Swindon, SN5 8UB) which is authorised and regulated by the Financial Conduct Authority, 25 North Colonnade, London E14 5HS. Omnis Investments Limited does not offer investment advice nor make recommendations regarding investments. Potential investors are particularly advised to read the specific risks and charges applicable to the Funds which are contained in the Prospectus and Key Investor Information Documents (KIIDs).

Omnis Investments Limited is registered in England and Wales under registration number 06582314 (Registered Office: Washington House, Lydiard Fields, Swindon SN5 8UB).