Market Update: FED minutes and jobs data to shed light on health of US economy

Market Update: FED minutes and jobs data to shed light on health of US economy

3rd January 2018

LAST WEEK – KEY TAkeAWAYs

Stock markets register bumper 2017

Global stock markets had a bumper 2017 as investors kept faith with equities and other risk assets. The MSCI World index climbed 12% in sterling terms over the 12 months. The UK stock index, the FTSE 100, gained 12% while in the US the S&P 500 grew by 11%, again in sterling terms (source: FE Analytics, 1/1/17 – 31/12/17).

Asian stocks boosted by Chinese manufacturing data

Asian and emerging markets also had a strong 2017 – the MSCI Emerging Markets index climbed 25% in sterling terms – and 2018 kicked off with more gains as a survey of Chinese manufacturers beat forecasts. The Caixin-Market Manufacturing Purchasing Managers’ Index (PMI), which tracks the largest companies in the country, rose to 51.5 in December, up from 50.8 the previous month. A reading above 50 indicates expansion.

Mixed corporate outlook on US tax reform

A huge overhaul of the US tax system was finally approved late last month as the Senate passed president Trump’s tax bill, but not everyone is happy. One of the country’s largest investors, Goldman Sachs, said its fourth-quarter results due this month will be $5bn (£3.7bn) lower than expected because of revisions to corporate income tax, which will fall from 35% to 21%. UK based energy giant BP also predicted a short-term hit, however overall it was more optimistic on its future earnings.

Eurozone manufacturing at record high…

Activity in the eurozone manufacturing sector ended 2017 with record-high growth. IHS Markit’s final Purchasing Managers’ Index (PMI) rose to 60.6 in December, from 60.1 the previous month, thanks to strong rates of expansion in output, new orders and employment. The reading, which can be between 0 and 100, was the best for the region since the survey began in 1997.

… As UK PMI dips, but remains solid

IHS Markit also released the latest PMI figure for the UK, with the sector coming in a 56.3 last month, down from 58.2 in November. However, this was still a solid reading, considering that the November figure was the highest in more than four years. Manufacturing has remained strong in the UK since the EU referendum, thanks to the subsequent weakness of the pound.

Looking ahead - TALKING POINTS

All eyes on Fed minutes and US jobs report  

Last month’s interest rate increase from the US Federal Reserve may have been widely anticipated, but analysts are hungry for insights into policy makers’ anecdotal thoughts on the state of the economy. The Fed minutes released on Wednesday could reveal how the aforementioned tax reform might impact future decision making and what might be needed to boost sluggish inflation.

Unemployment is not such a problem for the US at present, and on Friday the Labor Department releases its latest data. Job growth averaged 236,000 in October and November and some economists believe up to 200,000 new roles were created in December. In October the unemployment rate dropped to 4.1% - the lowest level since December 2000, when it hit 3.9%.

 

US Unemployment Rate (%) – December 2016 to November 2017

 Rsz _us _unemployment _jan _17

Source: US Bureau of Labor Statistics, Tradingeconomics.com

 

2018 - a decisive year for Brexit

After the first phase of Brexit negotiations came to an end with an agreement on the UK’s so-called ‘divorce bill’ from the EU in December, 2018 kicks off phase two’s transitional arrangements. The early part of the year will see a focus on the conditions for the post-Brexit transition period requested by the UK, with the EU having previous offered continuation of the status quo until the end of 2020. This leads up to a EU summit in Brussels in late March with the EU’s chief negotiator Michel Barnier given a mandate to negotiate the EU’s future relationship with the UK. The goal is for a finalised withdrawal treaty to be completed in time for a further EU Summit in October 2018, with both sides needing to agree on a joint declaration of principles to begin in March 2019.

EU’s proposed timetable for Brexit negotiations

 Rsz _timeline

Source: Institute for Government analysis of European Commission documents, May 2017

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. 2017 was a largely successful year for investors who showed a willingness to stick with risk assets and therefore benefitting from the prolonged rally in equity markets. While this rally may continue well into the new year, the shrewdest investors are likely to be those who look to diversify their exposure across assets classes when risks outweigh potential future rewards, putting money to work in bonds and alternatives which could smooth returns in periods of heightened volatility.

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