July 2018 Investment & Economic Update
In our latest monthly investment update for July 2018, we look at how the investment markets, global economy and commodity prices are performing.
The FTSE 100 index of leading UK company shares finished June largely flat at 7,661.77, down slightly from 7,678.20 points at the end of May, a decrease of 16.43 points or 0.21% during the month.
The Office of National Statistics (ONS) has revised up economic growth in the first quarter of 2018 from 0.1% to 0.2%. The moderate increase was a result of construction output declining by 0.8% in the first quarter, a smaller decrease than the 2.7% that was expected due to the severe cold weather.
The revised economic growth will help to boost the anticipated poor level of growth for the second quarter, with the National Institute for Economic and Social Research (NIESR) stating that growth between March and May was just 0.2%.
The Consumer Prices Index (CPI) unexpectedly held firm at 2.4% defying the expectation of most economists that it would increase to 2.6% amid rising global oil prices. The lower than expected level of price inflation, accompanied with the sluggish level of growth, saw market commentators correctly predict that an increase in interest rates would not materialise in June.
The Monetary Policy Committee (MPC) voted to keep interest rates on hold at 0.5% in their June meeting. However, three out of the nine members of the MPC voted in favour of an increase in the Bank of England base rate to 0.75%, one more vote in favour of a rate rise than the previous MPC meeting.
The extra vote came from the Bank of England’s Chief Economist, Andy Haldane, which came as surprise to the market and increases the chance of a rate rise in August.
Data from the latest IHS Markit/CIPS UK manufacturing Purchasing Managers’ Index (PMI) shows the rate of expansion remained largely static, with the rate increasing slightly from 54.3 in May to 54.4 in June. The performance of the UK manufacturing remained relatively subdued in June, in comparison to the marked pace of growth earlier in the year.
Duncan Brock, Group Director at the Chartered Institute of Procurement and Supply, commentated on the stagnant growth saying, “The undercurrent of uncertainty was once again the main culprit as clients hesitated to place orders resulting in the overall index average over the second quarter becoming the weakest since the end of 2016 and optimism falling to a seven-month low in June”.
The European Union (EU) has introduced retaliatory tariffs on £2.4 billion worth of US goods which came into force as of 22nd June 2018. Duties have been imposed on products such as bourbon whiskey, motorcycles and orange juice. The tariffs have been introduced after US President Donald Trump announced in March that he would introduce tariffs of 25% on steel and 10% on aluminium imported into the US.
Over in the US, economic growth for the first quarter of 2018 was slower than previously thought as consumer spending and inventory accumulation were revised lower. The previously released first quarter annualised growth readings from the US Commerce Department were 2.2% and 2.3%, with the updated final reading given as 2%, the slowest pace of growth in a year.
Despite the revision down in first quarter growth, economists expect growth to have picked up in the second quarter, regardless of growing trade tensions. The Federal Reserve Bank of Atlanta’s GDP Now model is currently projecting second quarter annualised of 4.5%, although this is subject to change based on upcoming data.
In China, escalating trade war tensions between China and the US are also a concern with President Trump preparing to impose tariffs on $50 billion of Chinese goods and Beijing vowing to retaliate.
However, analysts are saying that slowing domestic demand posed an even larger threat to the Chinese economy. Fixed asset investment, a core driver of Chinese growth that includes spending on buildings, machinery and infrastructure, has grown at its slowest pace since 1995 in the first half of 2018.
China’s currency also hit a six month low against the dollar, while the Shanghai Composite index, the key stock market index in China, falling by 10% in June.
Meanwhile in Japan, industrial output declined far less than expected in May and the unemployment rate hit its lowest level in over 25 years signalling a gradual economic recovery from a slump in the first quarter. Economists expect output to continue to rise gradually as overseas economies gather strength, though trade friction with the United States poses the biggest risk to the outlook.
Looking at the global economy, the International Monetary Fund (IMF) has warned that President Trump’s trade policies are likely to hurt the US economy and undermine the world’s trade system. Christine Lagarde, director of the IMF, said that a trade war would lead “losers on both side” and have a “serious” impact.
While the IMF expects the trade dispute to have a relatively minor economic impact, slowing world economic growth by a fraction of a percentage point, the concern is how the dispute will affect market sentiment, with Christine Lagarde saying “What is more critical and more difficult to factor in at the moment is the actual impact on confidence”.
Returning to the UK, average house prices rose by 0.5% from May to June, and prices have risen by 2% in the past year, the slowest pace in five years, according to data released by Nationwide.
In London, prices have fallen by 1.9% over the second quarter, the only area of the UK to record a fall. However, prices in the capital were still 50% higher than they were in 2007, compared to 15% higher on average in the UK.
Nationwide have predicted that average house prices will rise by just 1% over the course of 2018. Robert Gardner, the Nationwide chief economist, said there has been “little change in the balance between demand and supply in the market” during the last 12 months.
The benchmark 10 year UK Gilt yield ended June at 1.28%, a small increase in its yield from 1.23% at the end of May.
£1 currently buys $1.3158 or €1.1315. The Forex Gold Index is $1,250.55/oz and the Silver Index is $16.02/oz. Brent Crude Oil Spot is currently $78.39/barrel.