This week, 7IM looks at the latest UK data, news about European production levels and provides an update on the last Federal Reserve Monetary Policy meeting. We also provide an update on the latest portfolio actions.
UK TRADE GAP WIDENS
Between the three months to February 2017 and the three months to May 2017, the total UK trade (goods and services) deficit widened from £6.9 billion to £8.9 billion. The widening of the trade deficit was mainly due to the larger increase in imports versus the higher level of exports, with imports especially growing from outside the EU. The news disappointed as an improvement in exports would help compensate for the lower levels of consumer spending and support the economy.
UK OUTPUT DROPS
Manufacturing output fell by 0.2% in May compared with April. This was due to a 4.4% drop in car production, the biggest fall since February last year and reflects a sharp decline in new car registrations. Meanwhile, the wider measure of industrial production fell 0.1%, following a 0.8% fall in April. Meanwhile, construction output also fell by 1.2% in May from April, compared to expectations of a 0.6% rise. It was also down 1.2% in the three months to May -the sharpest such drop since October 2015.
EUROPEAN PRODUCTION ON THE RISE
Industrial production beat expectations in three of the Eurozone’s largest economies in a sign of broadening and strengthening momentum in the region. Output growth in Germany unexpectedly accelerated in May, jumping 1.2% from the previous month, while gauges for France and Spain also exceeded forecasts, rising 1.9% and 1.2%, respectively. The latest data has been published ahead of a Euro area-wide report on 12 July. It will feed into the European Central Bank’s Governing Council debate on the state of the economy at its policy meeting that’s being held one week later. Officials are getting nearer to the point where they discuss how to pare back the level of stimulus, without tightening any financial conditions, even though inflation pressures remain muted.
US MONETARY POLICY MINUTES RELEASED
The Federal Reserve’s latest meeting minutes flagged a number of members are warning that allowing unemployment to fall too low could lead to the US economy overheating or the emergence of financial stability risks. Raising its benchmark rate target a quarter point at the meeting, the Fed also discussed the how it might reduce its US$4.5 trillion balance sheet without disrupting the markets. The summary however did not reveal a timetable for any unwinding of that balance sheet.
Private equity firms have had a very strong run over the past few years. Discounts to the net asset values are now around their narrowest since the 2008 Financial Crisis, suggesting that further outsized gains may be limited from here. As a result, we have reduced our overweight position. We may miss out on further upside, but prefer to be early in reducing risk.
Meanwhile, the dispersion product we own returned nearly 5% in June as it benefitted from the difference between the volatility of the Eurostoxx 50 Index and the volatility of the underlying constituents of the index. Bond yields rose following the ECB’s comments that signalled a potential tapering of its loose monetary policy in the Eurozone, and which hurt the broader equity market but benefitted banks –a situation where the dispersion trade would benefit.
THREE ANNOUNCEMENTS DUE THIS WEEK
12 July –UK Unemployment Rate // 14 July –Eurozone Balance of Trade // 14 July –US Inflation Rate
SOURCES: ONS, REUTERS, BLOOMBERG, 7IM
Before you go
We hope you’ve enjoyed reading this article. Use the Get in touch box below to sign up for future investment updates. These take the form of regular market and investment updates and our 7IM webinar series.
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.