The US have just increased interest rates for a second time in 2018, with two more hikes now looking likely this year. The Bank of England (BoE) signalled that they will likely do the same before year end and the European Central Bank provided details on the reduction in their bond purchasing programme and hinted if the data remains strong, interest rates in Europe could change from next year.
The ratcheting up of trade tensions remains and is the widely cited headwind for equity markets. The Wall Street Journal reported Chinese President Xi telling a group of 20 mostly American and European CEOs at a Global CEO Council meeting in Beijing that China would strike back at US trade measures. Harley Davidson said it would shift production overseas to avoid EU tariffs on its motorcycles. This occurred after EU raised tariffs on motorcycles to 31%, from 6%, in response to the Trump administration metals tariffs, which would have increased export cost of each bike by around $2,200 (WSJ).
The BoE caught investors by surprise at the last MPC meeting. As widely expected interest rates in the UK were kept at 0.5% by the Bank’s Monetary Policy Committee. Significantly however, the balance of the vote changed as the chief economist Andrew Haldane changed his stance. This is important because it’s the first time the BoE’s chief economist has dissented since 2011. This wasn’t anticipated by the markets and has boosted the probability of an interest rate rise later in the year. The probability of an August hike has now increased from 35% to 58%, and the probability of a hike by November has increased to over 80% from below 50% at the end of May.
It was against this backdrop that stock markets have delivered mixed returns more recently; Emerging Markets and Asian equities are under pressure as a trade war hit them more specifically, also a continuing stronger dollar tends to be a negative backdrop from the region. The strong economic data from the US continues to push the equity market higher. The UK has rebounded strongly from the lows at the beginning of the year thanks to fresh weakness in sterling and the recovery in the Oil price.
Deputy Chief Investment Officer