Weekly Market Update: Markets unfazed by US withdrawal from Iran Deal

Mon 14 May 2018

Read our full Market Update Week 18

Market Update

Last week saw equity markets across the board in positive territory in both local and GBP terms. Emerging markets lead the way with a +2.5% gain (+2.4% in local), followed by both US (+2.5% in Dollars) and UK large caps at +2.4% in Sterling. Japanese and global equities returned +2.3% (1.3% in Yen) and +2.1% (2.1% in USD) respectively. Finally, European stocks trailed with gains of +1.2% (1.3% in EUR). Meanwhile, 10 year government yields rose as UK 10Y Gilt yields climbed 4.3 bps to 1.44%, US 10Y Treasury yields increased 2 bps during the week, ending the week at 2.97%, followed by a rise of 1.5 bps for German 10Y Bunds. The US yield curve continued to flatten last week, as the yield spread between 5 and 30Y treasuries reached their narrowest since August 2007. The BoE voted to keep rates on hold after cutting its growth forecast for the year to 1.4%, down from the 1.8% estimate made in February. As a result the pound sold off, however managed to retain some of it’s previous gains ending the week up 0.2% and 0.1% against the Euro and the USD respectively.

CIO Analysis

As predicted in our previous update, the Bank of England’s Monetary Policy Committee voted 7-2 to hold rates at 0.5% based on slower growth projections for the year. Meanwhile, weak consumer spending data for April out this morning has added to the gloomy outlook for UK equities. This has come as somewhat of a shock as sterling driven inflation is finally starting to abate and wage increases are just beginning to come through, which would suggest more, not less, spending. Following the demise of several large British retailers, such as BHS and Maplin, the high street continues to suffer with Mothercare hoping for a cash injection to remain afloat. While this may be seen as a buying opportunity for many, we are still cognisant that the uncertain macro and political backdrop could affect UK companies at a micro level. Elsewhere, the Italian Eurosceptic populist parties, Five Star and the League of the North, have reached an agreement to form a government. What this says for the future of the rest of the bloc remains in question, however with Eurozone PMI’s edging downwards, we are watching closely.

David Baker, CIO