This week we review the initial results of the Italian general election, provide an update on three more key pieces of news and report on the latest portfolio action by 7IM.
Preliminary results from yesterday’s Italian general election saw the 5Star Movement become the largest party in the lower house of the Italian parliament. They were far short of the majority needed to seize control. The worst result was for Matteo Renzi's ruling Democratic Party, which failed to gather more than a fifth of the vote. But while the anti establishment 5Star party did well in the south of the country, it was the far right Northern League that saw the broadest support in the north. It will take weeks of negotiations and collation building before Italy can claim to have a government, although no one has ruled out fresh elections to try to get a more decisive outcome.
The recent ‘Beast from the East’ and Storm Emma are expected to hit UK GDP growth by up to 0.2% in Q1 2018 if the bad weather persists. The effects will be mainly seen in the construction and retail sectors, but will also have an impact on the supply chains of big business, restaurants and the travel sector. Offsetting the slow down was that shopping could still be done online and there was an increasing ability for people to work from home, which would both help limit any economic damage.
The Eurozone’s inflation dropped back in February as the growth in the cost of services fell back. This will reaffirm European Central Bank (ECB) hesitation in sending a signal to tighten policy. Prices increase by 1.2% over the year to February, down from the 1.3% in the previous month, according to the European Commission's statistics office, which was in line with economists' expectations. The pace of growth of food, alcohol and tobacco prices – from 1.9% to 1.1% – was the main drag, while energy price growth moderated slightly, but was still the biggest upward push on the index.
In his first congressional testimony, the new Federal Reserve chair, Jay Powell, gave a bullish assessment of the US economic outlook, triggering speculation that he could be more aggressive in raising interest rates than the previous chair, despite the recent market volatility. Mr Powell said that his outlook on the US economy had strengthened this year and that he saw inflation to move towards the Fed’s 2% target. However, he stopped short of saying that investors should expect a larger number of rate rises in 2018. In his later Humphrey-Hawkins testimony, Mr Powell emphasised that interest rate increases will be gradual.
The shift in Labour’s policy to continue in a customs union with the EU puts pressure on Theresa May to soften her Brexit stance further given any bills being voted on in Parliament could easily be defeated. In 2017 and January 2018, our portfolios benefited from a put option that protected our non-Sterling denominated assets from a spike in the value of Sterling, and also supported our US Dollar holdings given the ongoing weakness of the currency. Last week, therefore, we invested in a further currency option, one which has a strike price of €1.19 and which would protect up to 15% of clients’ portfolios in the event of the Euro appreciating. It has a maturity date of November 2018, when we believe that the political debate currently driving market movements, rather than the economic fundamentals, should have a clearer direction.
THREE ANNOUNCEMENTS DUE THIS WEEK
07 Mar – US Balance of Trade (Jan) // 08 Mar – ECB Interest Rate Decision // 09 Mar – UK Balance of Trade (Jan)
SOURCES: BLOOMBERG; ONS, REUTERS; 7IM.
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Seven Investment Management LLP is authorised and regulated by the Financial Conduct Authority. Member of the London Stock Exchange. Registered office: 55 Bishopsgate, London EC2N 3AS. Registered in England and Wales number OC378740. The value of investments may fluctuate in price or value and you may get back less than the amount originally invested. Past performance is not a guide to the future. The investments may not be suitable for everyone and if you have any doubts you should contact your investment advisor.