This week, we provide an update on the last Bank of England decision on interest rates. We also highlight three key news items from around world and provide an update on our asset allocation.
The Bank of England Monetary Policy Committee (MPC) indicated that UK base interest rates could increase in May. The last vote in February had seen a unanimous vote for rates to remain at 0.5%. However, the March meeting saw two of the nine members back an increase to 0.75%. The news comes despite a fall in inflation to 2.7% versus a consensus of 3.0%. However, the Bank is still keen to get inflation nearer its target of 2.0%. If that hike goes ahead, experts believe that the Bank would then leave rates until later in the year, perhaps as late as November although a decision could be made in August.
The UK and EU reached a broad agreement on a 21-month Brexit transition period which will end on 31/12/20, providing an extension to the original two-year timeline laid out in Article 50. However, key areas such as how to deal with the border between Ireland and Northern Ireland have still to be resolved. The agreement allows the next stage of the negotiations to start and UK can also now begin to negotiate its own trade agreements with other markets, although it cannot implement them until the transition period ends.
The flash estimate of the Eurozone’s IHS Markit composite purchasing managers’ index fell to 55.3 in March, well below market expectations of 58.0 and down from February’s reading of 57.1. The fall was blamed on cold weather, the strong Euro and global political uncertainty. Any trade war between China and the US would also impact global economic growth, which in turn would damage Eurozone prospects. Separately, a report showed German business sentiment slightly dampened in March. Think-tank Ifo said its survey indicated the threat of protectionism in global trade is darkening sentiment in Europe’s largest economy.
The Trump administration announced plans for 25% tariffs on some US$60bn of Chinese imports, heightening fears of a trade war between the two countries. However, China appears to be keen to avoid a war, with Premier Li Keqiang stating that foreign financial groups to take majority stakes in Chinese securities firms among a series of other proposals. Meanwhile, US plans to implement steel and aluminium tariffs on imports from the EU and six other countries (Argentina, Australia, Brazil, Canada, Mexico and South Korea) were put on hold.
The formal quarterly tactical asset allocation process is now nearing its end as the investment team decide how best to implement the conclusions on the outlook for the global economy and financial markets. The team believe that growth continues to remain solid given the US tax boost is adding to already strong growth, recovery is stretching to the weakest part of the Eurozone and Japan and China remain stable. However, while the economic picture was good, there is a belief that the dead calm in markets throughout 2017 and into January 2018 is behind us as the market adjusts to higher inflation, tighter monetary policy and potential trade conflicts between US and China. The team will have to look at how to protect the portfolios if volatility increases, as fixed income instruments do not offer the same protection as they have in the past.
THREE ANNOUNCEMENTS DUE THIS WEEK
29 Mar – UK Final 2017 GDP Growth Rate // 29 Mar – US Personal Spending (Feb) // 29 Mar – German Inflation Rate (Mar)
SOURCES: BLOOMBERG, ONS, REUTERS, 7IM
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