This week we review the interest rate rise by the Bank of England, as well as flag three other pieces of news affecting markets out of the UK, EU and US. We also review recent market performance.
The Bank of England has raised interest base rates from 0.50% to 0.75%, marking the second rate rise in a decade. The decision is estimated to affect 3.5 million homeowners with variable and tracker mortgages although Mark Carney, Governor of the Bank, stated that people would be able to afford their mortgages because of the affordability test completed when mortgages were taken out. Carney also confirmed that there would be “gradual” and “limited” rate rises to come with rates expected to reach 1.5% in three years time.
The Bank of England’s governor, Mark Carney, has warned that the likelihood of the US leaving the EU without a deal was “uncomfortably high” and “highly undesirable”. Carney also stated that the Bank had put preparations in place to prevent disruption, should negotiations fail to come to an agreement, as well as working with banks to ensure that there is sufficient capital and liquidity to withstand the attendant shocks. His comments come as Theresa May cuts short her holiday in Italy to seek support from Emmanuel Macron at his summer island retreat off the French Mediterranean coast.
Investor sentiment as measured by Sentixrose in August from 12.1 in July to 14.7, as poll participants pointed to improvements on the current environment and for future expectations. The survey, conducted after the meeting between the EU Commission chief, Jean-Claude Junker, and US President Donald Trump, rose primarily because of lower expectations among investors of a trade war, despite signs that the region’s economic growth rate had slowed in the first half of the year.
Despite an average of 224,000 jobs being added over the past three months and unemployment falling to 3.9%, wage growth has failed to pick up as much as expected and, at 2.7%, is lower than the consumer price index, which stands at 2.9%. Explanations for the slow wage growth vary, with economists citing effects from the Financial Crisis, residual slack in the labourmarket, low productivity growth, the decline of union membership, and the use of non-wage benefits. Meanwhile the Federal Reserve has been steadily lifting interest rates to ensure that any wage growth does not fuel inflation, and has signaled that it is likely to raise rates again in September.
In the first six months of 2018, the Russell 2000 Index, the US’s small and mid cap index, outpaced the S&P 500 Index by about 500 basis points, returning 7.7%. However, this late cycle performance is unusual as typically wage growth and other cost increases hit these companies hardest. So, at the beginning of June, we sold down our remaining holdings in the Russell 2000 (2% in Balanced) and invested the proceeds into the S&P 500. Since then the S&P has outperformed the Russell by 2.34%. We continue, however, to watch the performance between the two. Should trade tariffs spike, the Russell 2000 could again see higher levels of interest as its earnings are typically more insulated from a rising US Dollar and complex global supply chains. However, there is increasing talk of a trade deal ahead of November’s mid term elections.
THREE ANNOUNCEMENTS DUE THIS WEEK
09 Aug – ECB Economic Bulletin // 10 Aug – US Inflation Rate (Jul) // 10 Aug – Preliminary GDP Q2 Growth Rate
SOURCES: BANK OF ENGLAND, BLOOMBERG, REUTERS, ONS, 7IM
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