This week’s market overview covers UK and US GDP growth revisions and Eurozone confidence levels, along with the usual portfolio update and a view on one thing that’s driving markets.
FANG STOCKS LEAD INDEXES
The NASDAQ Composite and S&P500 continue to benefit from growth fuelled by the FANG stocks of Facebook, Amazon, Netflix and Google. While all four are at near-record highs, investors argue that the latest rally is likely to continue for sometime. Three of the four recently posted better than expected earnings’ numbers and while Facebook’s results were also positive, it was their unannounced decision to use GAAP accounting standards that hurt the stock price.
UK GROWTH REVISED DOWN
The Office for National Statistics (ONS) released its second growth estimate for Q1 GDP growth, stating that economic growth slowed to 0.2% in the quarter, down from its first estimate of 0.3%. The ONS stated that the slowdown was due to "consumer-focused industries, such as retail sales and accommodation". In Q4 2016, the UK economy had expanded by 0.7%, and the latest numbers confirm what many economists were expecting in that consumers are cutting back on spending given inflation has accelerated. Inflation hit 2.7% in April –the highest figure since September 2013 –versus the 2.3% growth seen in wages. A higher value of Sterling could help here though.
EUROZONE CONFIDENCE SLIPS
The Eurozone’s economic confidence fell for the first time this year according to the European Commission and its consumers’ outlook for inflation weakened. The index of executive and consumer sentiment fell to 109.2 in May, down from the revised April number of 109.7. While that was lower than economists’ expectations, the gauge remains close to its highest level in a decade. The decline in confidence marks the first slight stumble by the Eurozone economy, which had shown solid signs of strength this year. IHS Markit, which publishes a monthly activity index, said last week that the economy is growing at a pace that would warrant tighter monetary policy if it wasn’t for weakening inflation.
US GROWTH REVISED UP
The US economy grew at a faster pace than initially thought in the first three months of the year. US growth was 1.2% in the first three months of the year versus the 0.7% initial estimated. However, the revised figure still represents a slowdown from the 2.1% growth rate recorded in Q4 2016. While consumer spending improved from the initial estimate of 0.3%, its growth remained weak at 0.6%, slower than any quarter since 2009.
7IM reduced its US Dollar holdings across all its unitised portfolios to zero, and increased its exposure to Sterling by the same percentage in each of the risk profiles. Balanced fund investors therefore saw their Sterling allocation increased from 65% to 75%, with the rest of the foreign exchange exposure in Euros and Emerging Market currencies.
While the current attention is on the election, Brexit negotiations will follow swiftly afterwards and clarity on the direction could provide an opportunity for Sterling to rally further. In addition, economic growth in the UK is still positive –we should not forget, that before the EU Referendum, the UK was one of the strongest developed economies, along with the US. While growth may be slowing, it has not slowed enough to justify the sharp fall in Sterling since the Referendum.
THREE ANNOUNCEMENTS DUE THIS WEEK
31 May – Eurozone Unemployment Rate // 02 June – UK Construction PMI // 02 June – US Balance of Trade
SOURCES: FT, BLOOMBERG, 7IM
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