Despite what appears to be an ever-growing list of concerns for capital markets to digest, as London faced another terrorist attack and North Korea fired another missile over the borders of Japan, equity markets around the globe, except for the UK had a decent week. The S&P 500 along with the euro first 300 index both rose over 1%. The S&P 500 topping 2500 for the first time. The FTSE 100 reacted to the recent strength in sterling. Sterling rose to its highest level against the US dollar since the Brexit vote as the Bank of England signalled this week they are getting closer to raising interest rates in the coming months. Possibly as early as November. The catalyst for the change in interest rate sentiment was the fall in the unemployment rate to 4.3% and the rise in inflation to 2.9%. The other event this week was the removal of the 1% pay cap for public sector workers.
With inflation running at nearly 3%, this cap was always liable to come under strain, however, markets will see this decision as the potential to be the thin end of the wedge for public sector pay increases.
UK investors face a dilemma currently, those stocks exposed o the domestic economy struggle as the economy struggles, invest overseas and be exposed more to the changes in sentiment to sterling. The US dollar had a better week, against its basket of currencies. The dollar woes this year have been placed at Mr Trump’s doorstep, perhaps his recent improvement in the polls has helped push the dollar a little higher. Domestic holders of UK equities had a poor week, domestic holders of UK gilts also did not fare too well either as the yield on the 10-year gilt rose from 1% to 1.3%. The curve itself shifted higher but did not change shape.
Looking to the week ahead the threat of an increase in geopolitical tensions cannot be ignored, however, so far, the impact on equity sentiment seems limited. As much as the Bank of England were in focus last week, it will be the turn of the Federal Reserve this coming week. There is no expectation that the Federal Reserve will increase interest rates this week, however, there is some expectation that we may get more clarity on the Fed’s shrinking of the balance sheet and the path of interest rates in the coming months.
After last week’s UK data showing a widening gap in real incomes, this week we get the latest retail sales data for August. Brexit is likely to remain in focus as Theresa May delivers a keynote speech in Florence this week that is expected to set out her plans for a transition deal.