Monthly Investment Update – October 2017
In our latest monthly investment update for October 2017, we look at how the investment markets, global economy and commodity prices are performing.
The FTSE 100 index of leading UK company shares finished August largely flat at 7,372.76 points, a modest decrease of 57.86 points or 0.8% during the month.
The Office for National Statistics has revised down UK economic growth for the second quarter. Gross Domestic Product (GDP) grew by 1.5% from a year earlier, down from an earlier estimate of 1.7%. The ONS named a drop in activity in the film industry following a particularly strong June as a key factor in the fall.
UK inflation data realised in September saw a 0.3% increase from 2.6% in July to 2.9% in August.
According to the Office for National Statistics (ONS), the prices of most goods increased during August owing largely to rising import costs for retailers. The largest increase came from clothing and footwear with a 4.6% year-on-year increase while petrol and diesel prices increased 1.5% and 1.7% retrospectively from the previous month.
Despite the increase in inflation, the Monetary Policy Committee (MPC) voted to keep interest rates stable at 0.25% in their September meeting by seven votes to two. This was largely expected as many economists have commentated that interest rates are unlikely to increase until late 2018 or early 2019.
However, a few days later in a speech in Washington to the International Monetary Fund (IMF), Mark Carney said that “some withdrawal of monetary stimulus is likely to be appropriate over the coming months” although any increases in interest rates will be “gradual” and “limited”. The hint of a sooner than expected rate rise led the pound to jump 1% against the dollar.
In the Eurozone, European Central Bank (ECB) president Mario Draghi, highlighted that growth in the Eurozone has been faster than expected in the first half of 2017. This came after the ECB agreed to keep interest rates and its bond buying stimulus unchanged. The ECB has subsequently raised its economic growth forecast up to 2.2% which would be the fastest growth level for ten years.
The IHS Markit/CIPS UK manufacturing Purchasing Managers’ Index (PMI) shows that UK Manufacturing had a solid month with the PMI at 55.9 in September. This was slightly lower than the 56.7 in August but still above its long run average of 51.7.
Production rates and new orders continued to rise but cost inflationary pressures also increased, owing to a combination of rising commodity prices, the exchange rate and increase supply chain pressures.
Rob Dobson, Director at HIS Markit, commentated that “On balance, the continued solid progress of manufacturing and export growth is unlikely to offset concerns about a wider economic slowdown, but the upward march of price pressures will add to expectations that the Bank of England may soon decide that the inflation outlook warrants a rate hike”.
In the US, second quarter growth has revised up for the second time from 3% to 3.1%, which was previously revised up from 2.8%. This represented a marked rebound from the first quarter growth of 1.2%.
However, hurricanes Harvey and Irma that devastated parts of Texas and Florida, respectively, are expected to see dampen the momentum of growth in the third quarter. Even with the boost to growth that rebuilding is expected to generate in the fourth quarter of 2017 and the first quarter of 2018, economists still see President Trump’s 3% growth target as ambitious.
Turning to China, the US rating agency Standard and Poors (S&P) has downgraded China’s credit rating from AA- to A+ stating that “The downgrade reflects our assessment that a prolonged period of strong credit growth has increased China’s economic and financial risks”.
The downgrade was the second by a US credit agency in four months after Moody’s cut their credit rating for China in May. This indicates that China’s efforts to convince the world of its economic strength in the face of soaring debt and slowing economic growth are falling on deaf ears.
In Japan, inflation rose from 0.5% to 0.7% in August on an annual basis. While the increase is welcomed in the countries long fought battle with deflation it still puts Japan’s inflation well below its 2% target.
Japan’s prospects have recently improved, however, with investments linked to the Tokyo 2020 Olympics giving the economy a much needed boost. The internal affairs ministry noted this was below the market expectation of 0.9% but it was also the first increase in two months.
Turning to the UK housing market, London house prices have fallen for the first time in eight years according to Nationwide. The average value of London housing fell by 0.6% year-on-year during September, making it the weakest performing region in the UK for the first time since 2005.
Across the UK housing market annual price grow continued, albeit at a reduced rate, down from 2.1% to 2% making it the slowest rate of increase since June 2013, based on Nationwide’s data. Robert Gardner, Nationwide’s chief economist, said low mortgage rates and “healthy” rates of employment growth were supporting demand, “but this is being partly offset by pressure on household incomes, which appear to be weighing on confidence”.
The benchmark 10 year UK Gilt yield stands at 1.39% at the end of September, up from 1.03% at the end of August, a sharp increase of 35% month on month. The increase came as markets priced in an interest rate rise in the next few months, owing to Mark Carney’s comments during September.
£1 currently buys $1.3325 or €1.1348. The Forex Gold Index is $1,283.10/oz and the Silver Index is $16.86/oz. Brent Crude Oil Spot is currently $58.59/barrel.