This week we focus on the European Central Bank’s decision to start to taper its bond purchasing programme, and its impact on the region’s equity market (and 7IM portfolios) given our allocation to the asset.
In 2015, the European Central Bank (ECB) decided that its powers of interest rates changes and cheap lending to banks didn't go far enough and started a programme that was the 21st century equivalent of printing money – Quantitative Easing (QE). A year later and measures were stepped up. But a recovery in the Eurozone economy is now leading to a slow taper. And while the current spending level will last until September 2018, the door was left open for QE to continue after that date if the central bank felt it was needed.
The UK economy grew 0.4% in Q3 2017, up slightly from the 0.3% rate of growth seen in Q1 and Q2. Both services and manufacturing expanded, although the construction sector activity contracted. The first estimate of the figure released by the Office for National Statistics, however, was a pleasant surprise given the consensus was for 0.3% for the quarter. It was also encouraging as the main growth in GDP was driven by the services sector which contributed 0.29% to the overall figure. The sector accounts for almost 80% of GDP. And while construction was lower, the figure is still above its pre-downturn peak.
The flash estimate of the Eurozone’s Composite Purchasing Managers’ Index (PMI) slipped to 55.9 in October from 56.7 in September as the result of a softer reading from the services sector. The Services PMI slipped to a two-month low of 54.9 from 55.8 in September - This was well below September's 55.8 result and the 55.6 consensus forecast – although the manufacturing index rose to 58.6 from 58.1. The expansion in manufacturing also supported job numbers as the growth in manufacturing jobs was the strongest rate since June 1997 and when data collection began. Service providers also took on more staff although this level was the same as seven months ago.
The US economy expanded at an annualised rate of 3% during Q3 2017, which was more than was anticipated and despite the impact of hurricanes Harvey and Irma. Combined with the 3.1% growth recorded in Q2, the US has now registered the strongest six months of economic expansion since 2014. It was strong consumer spending that held up the economy in Q2 and also makes the biggest contribution to growth in Q3, increasing by 2.4% after a 3.3% rise in Q2.
7IM’s holding in European equities, which we increased in September following the last internal Tactical Asset Allocation discussions, performed well last week on the back of the positive market moves, with the Euro Stoxx 50 up 1.31% on the week. The news of the ECB announcement of the beginning of the end to the central bank’s QE programme – but in a careful and considered approach – was well received given President Mario Draghi has been cautious in his approach so as not to hinder growth, and since the bank’s 2% inflation target hasn’t been reached despite €2tn in purchases. The recent strength in the Euro has also complicated matters. Markets, however, seemed to be placing continued their trust in a series of well flagged reductions being affected, with an option to change direction, versus a sudden stop that would spook investors.
THREE ANNOUNCEMENTS DUE THIS WEEK
31 Oct –Eurozone Unemployment // 1 Nov –US Fed Interest Rate Decision // 2 Nov –Bank of England Interest Rate Decision
SOURCES: BLOOMBERG; EUROSTATS; ONS; 7IM.
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