Weekly Investment Update
21 September to 29 September 2017

Headlines
Among UK consumers and businesses confidence is slowly rebuilding, although all remain cautious following the nation’s Brexit vote. Following signs earlier this week that consumer spending is starting to recover, a survey from Lloyds Bank showed an improvement in sentiment. That will bolster the case among Bank of England policy makers who have said the economy will probably be strong enough to warrant higher interest rates soon.

The dollar is headed for its best week in 2017 as Treasury yields soared after Federal Reserve Chair Janet Yellen flagged increased prospect of a December rate hike and President Donald Trump’s tax plan spurred talks of a wider budget deficit.

The Marketplace

  • Angela Merkel wins German election
  • Federal Reserve to begin balance sheet reduction in October
  • US President Trump imposes fresh sanctions on North Korea
  • China long-term sovereign credit rating downgraded by S&P
  • Theresa May clarifies Brexit stance in Florence speech

Market Focus
US

  • The US imposed fresh sanctions on North Korea after Donald Trump signed an executive order allowing him
    to take action against anyone financing or facilitating trade with North Korea.
  • US President Donald Trump made a strong statement of intent towards North Korea in his debut speech at
    the UN general assembly, noting that if the US was forced to defend itself, it would ‘totally destroy North
    Korea’.
  • On Wednesday the Federal Reserve left interest rates unchanged, but suggested a rate rise was likely
    before the end of the year. The Federal Reserve also announced plans to start reducing its balance sheet in
    October, rolling off $10 billion initially.
  • In the second quarter of 2017 the current account deficit was slightly larger than expected at US $123.1
    billion, roughly 2.6% of GDP.
  • US equities rose 0.1% whilst US Treasuries fell 0.3%.
  • US stocks closed higher on hopes US tax reform will aid economic growth. The Dow Jones increased 0.2%, while the wider S&P 500 also rose.

UK

  • Prime Minister Theresa May’s Brexit focused speech on Friday was well received by both UK and EU
    officials with the speech indicating a move away from hard Brexit rhetoric. May clarified numerous medium
    term objectives, including a post-Brexit transitional deal to smooth the exit process.
  • On Monday Bank of England Governor Mark Carney made a strong signal that interest rates were likely to
    rise soon, taking note of inflation being at 2.9% year-on-year, well above the 2% target.
  • Moody’s cut the UK’s credit rating on Friday night from Aa1 to Aa2 citing the challenges of Brexit on public finances.
  • Retail sales rose 1.0% month-on-month versus 0.2% expected, pushing the annual rate up to 2.8%.
  • UK equities rose 1.3% during the week whilst Sterling fell 0.3% versus the US Dollar.
  • UK stocks recovered in late afternoon trading to finish slightly ahead. The FTSE 100 closed higher led by building materials group CRH, up 2.9%. Tobacco group Imperial Brands fell 4% after it said it would meet profit expectations for the year, though it noted a difficult market.

Europe

  • On Sunday Angela Merkel won the German election, a result which was expected, although this was her
    worst election result as leader of the party. Merkel now has the tough task of forming a coalition
    government. Of particular note was the strong election result of the far-right Alternative for Germany party.
  • Portuguese 10 year sovereign bond yields fell 37 basis points on Monday following a credit rating upgrade
    by the S&P to BBB-.
  • Spanish police raided the offices of Catalan government officials and arrested at least 12 following the
    progressing independence movement in the Catalonia region.

Asia

  • China’s long-term sovereign credit rating was downgraded from AA- to A+ by S&P, citing its sustained
    period of strong credit growth increasing economic and financial risks.
  • The Bank of Japan voted to hold interest rates at 0.1% and kept its yield target for 10 year Japanese bonds
    at 0.0%.
  • Asian stocks were mostly higher on the final trading day of what’s been a strong quarter, with emerging markets coming under pressure.