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3rd July 2017
Market Commentary July 2017

Market Commentary July 17

The last quarter has witnessed plenty of events to keep markets interesting and investors guessing. Brexit negotiations finally began but it is far too early to draw any meaningful conclusions. The opening salvos have been fired but it will be a long and winding road. The remaining members of the EU are now showing more solidarity than we have seen in a while; the recent French election has removed the threat from the far right (for now) and this has galvanised a new belief amongst EU nations. This by no means suggests that the EU and Eurozone are fixed however, only last month Italy injected 17bn Euros in a further bank bailout.

The misjudged call for the UK general election has weakened Mrs May’s credibility and looks to have put her on the back foot in not just EU negotiations but at home as well forcing her to cobble together a much criticised loose agreement with the DUP in order to establish to a workable majority; the question now is if the present government will be able to stay in situ for the remainder of the Brexit negotiations, let alone for the next five years.

Equity markets have been driven up over recent years by the hunt for yield, pushing investors up the risk scale to get a return on investment of any substance. Record low interest rates have left traditionally safe investments on negative real returns and, coupled with unprecedented government intervention have driven one of the longest bull runs in history. Several markets across the world reached new highs over the last few months with investors continuing to look for dips in which to add cash to risk assets.

The tide may be turning, however. The Federal Reserve has increased interest rates twice this year, most recently on June 15th with a 25 basis point rise to 1-1.25%.

The European Central Bank was also hinting at reducing the asset purchase programme across the Eurozone but it then moved quickly to reassure markets that this was not what Mario Draghi was alluding to when he said that ‘deflationary forces have been replaced by reflationary ones’. Could we be in for a ‘taper tantrum’ along the lines of that which we saw in the US? European bond yields have risen in anticipation.

In the UK, there are signs that interest rates may begin to increase sooner than expected, with the Bank of England’s Monetary Policy Committee voting narrowly by 5 to 3 to keep rates on hold at the June meeting. With inflation also picking up we may begin to see policy changing as well. 10-year Gilt yields have moved to 1.257% (as at the end of June), up from 1.064% at the beginning of April.

Large UK companies have benefited from an uplift since the referendum off the back of weakening Sterling, as around two thirds of income generated by the 100 largest firms is in foreign currency. This currency ‘bonus’ has helped to boost values since Brexit. However, many leading and domestically-focused share prices have made little progress over this period.

What we can conclude is that many variables and unanswered questions persist as we move towards a ‘new normal’ following arguably the biggest upheaval in financial markets since 1929. History will record the eventual outcome but in the near-term we are likely to see continued volatility across markets and maintain a cautious focus.