Monthly Investment Update December 2016
The FTSE 100 index of leading UK company shares finished November at 6,783.79, down by 170.43 points or 2.45% during the month.
Oil prices rose sharply on the last day of the month, providing a boost to commodity stocks after OPEC agreed its first cut to output since 2008. The deal sent oil prices up $4.21 a barrel in the US, to $49.44 a barrel.
Despite potentially good news for oil companies, other sectors fared less well.
Banking stocks were cut back after the Royal Bank of Scotland and others failed a new Bank of England stress test. Mining stocks also suffered due to a fall in the gold price following strong US economic data which boosted the value of the US dollar.
A surge in the US dollar helped Pound Sterling make solid gains against the Euro at the start of December. Our domestic currency continues to feel the benefits of rising UK gilt yields, due some say to a ‘Trump-trade’; anticipation of a fiscal spending spree by President Trump when he takes office in the New Year.
The US Federal Reserve reported economic growth across the United States between early October and mid-November. Retail sales, real estate markets and business service firms all reported rising activity.
Central bankers in the US are next meeting on 13th and 14th December, with the possibility of an interest rate rise still on the table, despite some uncertainty following the Presidential election result.
Closer to home, the Office for Budget Responsibility (OBR) used the Autumn Statement to warn households are likely to “feel the squeeze” next year.
They downgraded economic growth forecasts and warned living standards will be reduced due to weaker productivity reducing average earnings growth combined with rising price inflation due to the weaker pound.
Consumer confidence in the UK appears to be falling following the EU Referendum vote in June.
GfK’s latest Consumer Confidence Index reported a five point drop in November, with falling confidence reported across all categories. The index is now 16 points lower than last November. Scores for personal finances remain positive but there is reduced confidence in the outlook for the UK economy.
UK manufacturing sector growth slowed down in November, according to the latest Markit/CIPS purchasing managers’ index.
Activity fell from 54.2 in October to 53.4 in November, with an index reading above 50 indicating expansion. One factor believed to have contributed to a weaker index reading was the rising pound resulting in higher costs for manufacturers.
UK interest rates remained unchanged at 0.25% in November, with the next Monetary Policy Committee meeting not until January.
Bank of England Governor Mark Carney explained the Bank is willing to tolerate a bit of an overshoot in inflation over the course of the next year years in order to avoid rising unemployment.
They seem to be prepared to keep interest rates low, rather than raise rates to tackle any rising price inflation, in order to maintain the best possible conditions for economy growth.
Price inflation in the UK, as measured by the Consumer Prices Index, was recorded at 0.9% for the year to October. This was a slight fall on the 1% reported in September, which took economists by surprise, after they forecast a level of 1.1%.
The Office for National Statistics said factory gate prices and the costs of raw materials rose in October. These rising prices have not yet fed through into prices in shops.
The Bank of England is forecasting a rise in price inflation next year, when it is expected to go above the Bank’s 2% target, before tailing off in 2019.
The benchmark 10 year UK Gilt yield stands at 1.468% at the start of December, rising again over the past month.
£1 buys $1.26450 or €1.18930. The Forex Gold Index is $1,178.10/oz and the Silver Index is $16.67/oz.