Mazars Weekly Market Update: Weak UK growth sees Sterling sell-off

Mon 30 Apr 2018

Read our full Market Update Week 17

Market Update

Global equity markets were flat to positive in local terms last week, however a large sell-off in Sterling due to fading expectations for a rate hike at the next MPC meeting in May meant that returns were positive for UK investors. Global equities returned 1.6%, US equities 1.9%, European equities 1.1%, Japanese equities 1.9% and Emerging Market equities 0.9%, while UK equities returned 1.8%. US equities in particular were hit when 3M and Caterpillar posted earnings that beat market expectations, but issued outlooks which were more conservative than expected, causing a 2% market sell-off at the time. Meanwhile US 10Y Treasury yields peaked at 3.03% during the week, but finished essentially unchanged at 2.96%. The move in US Treasuries did pull UK 10Y Gilt yields higher also to peak at 1.57%, however they finished lower for the week at 1.44% following the announcement that UK GDP for Q1 grew at just 1.2% year-on-year, as mentioned reducing the likelihood of a May rate rise. In geopolitical news, both Koreas have held what seem like promising peace talks, with a view to denuclearisation of the peninsula.

CIO Analysis

Friday marked a milestone in post-cold war history, when after 70 years, Moon Jae-in and Kim Jong-un agreed to denuclearise the Korean peninsula. Could we attribute this to a more hands-off US foreign policy? Markets were, of course, unperturbed, as the risk of a nuclear war had significantly receded over the past few months. Instead, traders focused on the earnings season. Half of US companies have announced earnings, with 70% beating earnings estimates and 78% beating sales estimates. Despite the fact that we are probably looking at one of the best quarters since 2012, markets did not rise significantly, instead punishing companies with a constrained outlook. At 17x forward P/E and with less accommodation, it seems traders see good earnings as an excuse to take money off the table. This creates opportunities for active fund managers, but also reflects the cautions stance of the markets at this mature part of the cycle. In the UK, GDP came in lower than expected at 1.2%,with experts attributing the slowdown to bad weather. Whatever the case, the probability of a rate hike in May has dropped from nearly 100% to 23% on Friday.

David Baker, CIO