Weekly Investment Update
14 September to 20 September 2017

All the latest news including the surprise rise in inflation, the Bank of England holding interest rates and the price pressures of luxury items.

Inflation
Inflation in the UK rose from 2.6% last month to 2.9% in August, above the consensus estimate of 2.8% and predominately driven by clothing prices up 2.4% month-on-month (MoM), compared to just 1.0% MoM in August 2016. The latest inflation rate is the highest since June 2013, and above the Bank of England’s 2% target.

The increase mainly came from higher prices for clothing, footwear and household equipment. The weather conditions partly influenced brands to bring out winter collections and end summer sales earlier than last year.

If you are preferring equities and property over bonds higher inflation should be good for your portfolios. Companies can pass on rising costs to consumers and maintain their profit margins, this makes inflation is good for equities. Property prices and rents also tend to rise in line with inflation. In contrast, more defensive assets such as bonds maintain their income regardless of rising prices.

Bank Of England
Despite the surprising hike in inflation The Bank of England (BoE) decided to leave interest rates at 0.25%, but signalled very strongly that it is looking to change that fairly soon.

Following the announcement sterling strengthened by 1% and the FTSE fell about 1%. Markets are now pricing in the next BoE rate hike by the end of this year rather than late 2018. They are also indicating a 50% probability of a hike in November.

The Marketplace

  • Oil rose 3.4% on the week with Brent at USD 56
  • Gold fell 1.8 % to 1315
  • Haven assets decline, global equities rise
  • North Korea launches second missile over Japan

Market Focus
US

  • Retail sales down 0.2% in August extending losses on the dollar. Lower demand for autos and the effects of the hurricane large contributing factors
  • Fed expected to leave interest rates unchanged this week with a rate rise of 0.25% due in December
  • The S&P 500 Index was up 1.6% last week closing at 2500
  • The Dow Jones index ended the week at 22268, up 2.2%
  • Nasdaq was up 1.3% at 5988

UK

  • UK inflation near a 5 year high but wage growth remains subdued, a dilemma for BOE’s monetary policy committee, though increasing expectations (65% probability) for a rate rise in November
  • The FTSE was down 2.2% last week closing at 7215
  • Sterling climbed to its highest level since Brexit on the back of BoE’s more hawkish tone on rate rises. Up 3% vs the Dollar and 3.8% vs the Euro on the week
  • Yield on 2 yr gilts quadrupled over the last 3 months to ~0.45%
  • UK employment rose by 181,000 over the last three months: at 4.3%, unemployment is standing at a 40 year low

Europe

  • Juncker gives EU address pointing at further Euro Zone integration, particularly in bank regulation
  • Munich Re and Swiss Re expected to be hit with up to $3bn losses after Hurricanes Harvey and Irma
  • Angela Merkel the clear frontrunner in the upcoming German elections
  • The Eurostoxx 50 was up 2% closing at 3516
  • The Dax increased 1.8% to 12525

Asia

  • Nikkei closed +3.3% on the week at 19909
  • The Hang Seng finished the week up 0.5%
  • China suspends cryptocurrency trading prompting a 5 day fall in Bitcoin to 3750
  • China Industrial output rose 6% (vs. 6.6% expected) with retail sales up 10.1 (vs. 10.7% expected) over the last 12 months. Curbs on credit expansion seen as the main driver for the cooling.
  • North Korea launched a second missile over Japan, markets appear risk resilient to near constant provocations