MARKET UPDATE: BREXIT TALKS MOVE TO SECOND PHASE, DESPITE COMMONS BLOW FOR MAY

MARKET UPDATE: BREXIT TALKS MOVE TO SECOND PHASE, DESPITE COMMONS BLOW FOR MAY

18th December 2017

LAST WEEK – KEY TAkeAWAYs

EU leaders agree on Brexit talk progress as May loses commons vote

EU leaders agreed on Friday to move Brexit talks on to the second phase of negotiations ahead of the UK’s exit from the union in March 2019. This was a welcome end to a tough week for Theresa May who suffered defeat in the House of Commons on Wednesday as MPs voted 309 to 305 in favour of an amendment to her Brexit bill giving them a decisive vote on the final deal.

US Fed raises interest rates…

Janet Yellen’s final act as chair of the Federal Reserve (Fed) was to raise US interest rates by 0.25% to a range of 1.25% to 1.5%. The move, which was widely anticipated by analysts, was the third hike initiated by the central bank in 2017. Yellen told reporters that the labour market is expected to remain strong with “sustained job creation, ample opportunities for workers and rising wages”. Immediately following the Fed’s decision, The People’s Bank of China followed suit, raising its seven-day reverse repurchase rate to 2.5%, while the 28-day reverse repurchase rate was increased to 2.8%.

… As Bank of England and European Central Bank hold

The Bank of England’s Monetary Policy Committee (MPC) voted unanimously against changing interest rates (currently 0.5%) at its December meeting. However, with inflation above the central bank’s 2% target, policymakers reiterated the view that “further modest increases” are likely next year. The European Central Bank also kept its main interest rate unchanged at 0%, though raised its gross domestic product (GDP) growth forecast for this year to 2.4%.  

UK inflation ticks higher

As mentioned above, UK inflation is trending well above the Bank of England’s 2% target, coming in at a six-year high of 3.1% for November. The Office for National Statistics cited airfares and computer games among the culprits for pushing the figure higher, with Bank governor Mark Carney now required to write to the chancellor Philip Hammond to outline plans to cool price rises.

Republicans lose Alabama senate seat

Doug Jones became the first Democrat in 25 years to win a US Senate seat for Alabama, defeating controversial Republican Roy Moore in Wednesday’s vote. The result is seen as a blow to the Republicans who now have a majority in the Senate of just 51-49, and this does not leave much leeway should there be dissenters on the final version of tax reform legislation, also unveiled last week. Democrats will now believe they could gain control of the chamber in the 2018 mid-term elections.

Looking ahead - TALKING POINTS

Catalans head to the polls as eurozone sentiment data due

The Catalan regional election will be held on Thursday, which will be vital in determining whether there will be more political unrest in Spain to come in 2018. The previous Catalan cabinet was sacked by prime minister Mariano Rajoy in October following its independence vote, with the region now under direct rule from Madrid. With seven parties standing, some polls suggest that pro-independence parties could renew their parliamentary majority although the result is expected to be tight. An absolute majority in the Catalan parliament requires 68 seats – the chamber has 135 representatives. Catalonia accounts for 19% of Spain’s GDP, just ahead of Madrid, so further unrest would cause more undue stress to the economy. The Omnis Managed Portfolio service holds minimal exposure to the country.

Also published next week is consumer confidence data for the eurozone; the sentiment index currently stands at its highest level for 16 years after a strong year for the region’s economies.

EU consumer confidence index – Dec 2016 to Nov 2017 Rsz _euro -area -consumer -confidence _dec _17

Source: European Commission, Tradingeconomics.com

Bank of Japan to end busy year for policy makers

After the Bank of England and the US Federal Reserve had their say last week, the Bank of Japan will be the last of the world’s major central banks to take the stage this year. The Bank is expected to hold its short-term interest rate target at -0.1%, while governor Haruhiko Kuroda will oversee a continuation of its massive stimulus programme. The idea behind this quantitative easing is to support inflation, which at 0.8 in October (consumer price index) remains well below the 2% target. Japan has recorded seven consecutive quarters of growth, helped by low unemployment and strong data for exports which have been boosted by the weak yen. Data released over the weekend showed the value of Japanese exports rose by 16.2% year-on-year in November, according to the Ministry of Finance, while the country has maintained a trade surplus for six consecutive months.

Japanese exports (¥bn) - Dec 2016 to Nov 2017

Rsz _japan -exports

Source: Ministry of Finance, 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. That the UK and EU are on to the second stage of Brexit negotiations is a huge relief for investors, though as evidenced by chief EU negotiator Michel Barnier’s recent statement that there is “no way” the UK will be able to negotiate preferential trade terms, a great deal of toing-and-froing can be expected over the coming months. The good news for investors is that equity markets continue to be buoyed by monetary policy that remains exceptionally supportive, and propelled by a global economic growth outlook that appears robust. However, diversification across different asset classes will become even more essential in 2018 as volatility is likely.

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).