Monthly Market Outlook July 2018/August 2018Monthly Market Outlook Article
Global markets, except the US, have ticked down over the past month as investor concerns over trade wars and a crisis in Turkey have weighed on risk assets. An impressive Q2 earnings season in the US led to its outperformance. Currency moves in the past month have been notable, with the dollar strengthening against both the pound and the euro. This has been driven by robust economic data in the US, as well as political woes in the UK and Eurozone.
Sharp declines in the Turkish lira have pushed Turkey into an economic crisis, threatening the country's banking system. President Erdogan has accused the West of waging economic war with Turkey and his rhetoric has inhibited the Turkish central bank from raising rates. This has posed large questions about the central bank's independence. To make matters worse, Trump imposed sanctions against Turkey after they refused to release a detained American pastor who is accused of having connections to those responsible for a failed 2016 coup. With two erratic leaders, it is difficult to say how this situation will progress. The situation has hurt the global stock market as there is a fear of contagion, with European banks set to be the most affected. The global trade war has not shown any signs of subsiding over the last month, with the rhetoric worsening between the US and China. This has pushed the Chinese currency down considerably versus the dollar, at a time when Chinese economic indicators are softening.
As expected, the Bank of England (BoE) raised rates by 0.25% to 0.75%, the highest since 2009. This was a unanimous vote but they have retained their wording that further rate rises will likely be at a "gradual pace and to a limited extent". The unanimous vote came as a surprise, and was deemed slightly more aggressive than expectations. However, the tone of the press conference comments were more dovish and the pound's slide resumed. Questions focussed on Brexit, but the governor maintained his stance that there are a wide range of outcomes and monetary policy will react accordingly. With Brexit, we saw little progress over the past month but Theresa May met with Macron to discuss her plans. Little seemed to come out of this meeting and it is starting to look like a 'hard' Brexit is increasingly likely.
Looking to the US, the Q2 corporate earnings season showed remarkable growth. Sales growth accelerated from 9% in Q1 to 10% this quarter, with the growth broad-based across sectors. Advance GDP for the second quarter came in at a lofty 4.1% annualised, driven largely by a rise in consumption from 0.5% to 4% over the quarter. The economy has been considerably supported by fiscal stimulus in the first half of 2018, and this may tail off in the back end of the year. However, survey data remains near multi-year highs. The main concern in the US economy is Trump's contentious protectionist policies, which have the potential to escalate trade tensions and weigh on the global economy.
In the Eurozone, the past month saw a continuation of the moderate slowdown seen in the region since Q1. GDP for the second quarter came in at a disappointing 0.3% (quarter on quarter) and the European Central Bank (ECB) made no change to its monetary policy at its August meeting. Concerns are centred on the potential for a clash between the EU and the new Italian government, as well as the currency and confidence crisis in Turkey.