Weekly Investment Update
6 September to 13 September 2017

All the latest news including the European Central Bank and the US Federal Reserve.

The European Central Bank (ECB)
Following the European Central Bank’s (ECB) September meeting, President Mario Draghi indicated that the Bank’s plan to start scaling back its quantitative easing programme would be announced in October. President Mario Draghi also said interest rates would be kept at current levels while the programme winds down.

He failed to offer any details about the timing or level of tapering, yet stated the Bank’s plans for the order of policy normalisation have not changed and it will not raise interest rates until well after asset purchases finish. We think the ECB is unlikely to simply stop its €60bn a month bond buying programme, and is more than likely to reduce it, depending on the conditions of the economy.

Inflation expectations for 2018 and 2019 were reduced even further below the ECB’s 2% target. Positively, the euro is up about 15% on the dollar so far this year, while noting that the underlying strength of the economy would ultimately lead inflation back towards target. The ECB will not want to do anything to hinder the decent recovery currently seen in Europe.

This should be viewed as positive for anyone holding European equities, also appreciation of the euro is good. We think it is likely that the currency will continue to appreciate against sterling and the dollar.

The USA Federal Reserve (Fed)
The resignation this week of the vice-chair of the Federal Reserve (Fed) Board of Governors – Stanley Fischer means there will be four vacancies at the central bank, meaning US President Donald Trump has significant scope to reshape the committee. There could also be a fifth when its chair Janet Yellen term expires next year in February – although her future has not yet been confirmed.

Trump is keen to see the Fed adopt a business-friendly light approach to regulation, in line with his own political agenda, alongside a growth-orientated monetary policy of low interest rates. This turnover of personnel is unprecedented and comes at a critical time for monetary policy. The direction of Fed policy is hugely important to markets and big changes could alter the dynamics of the market.

Whatever changes we see at the Fed Blenheim Global Assets think long term it is unlikely to be deterred from its broad commitment to a gradual tightening of monetary policy.

Summary
The global economy is in a synchronised growth phase, the likes of which we have not seen in this current cycle until recently. Most economic indicators – including purchasing manager indices, survey data, consumer confidence and unemployment levels – show healthy economies around most of the world, which has resulted in global GDP growth reaching 3.8%, its fastest pace for seven years. This improvement in fundamentals has produced a strong rebound in business confidence and corporate profits, which has led a recovery in capital expenditures.

Markets have been exceptionally benign of late but that (probably) won’t go on forever. If history is any guide then a setback is overdue – implied volatility is bouncing off all-time lows and this is the third longest period between falls of over 3% for the S&P 500 since World War II. There are various serious risks out there that could trigger a correction, particularly around geopolitics and central bank policy, but there has always been something to worry about throughout history so any such setback should not come as a surprise and would probably be healthy for the longer term. Indeed there were plenty of negative events in the last year that could have reasonably been expected to prompt a correction, but instead markets have continued to climb the wall of worry, much to the surprise of most investors. We have always stressed the difficulty of market timing around particular events or risks, instead encouraging a longer investment horizon, and this recent phase certainly supports that. It is important to stay invested.

The Markets

  • Oil prices rose 2% on the week with Brent at USD 53.9
  • Gold rose 1.9 % to 1347, its third week of gains
  • Risk appetite returns as treasuries retreat, stocks advance
  • Apple set to launch the iPhone 8 and X models this week
  • Hurricane Irma devastates the Caribbean and Florida