Save us from bullish analysts

The press has been dominated by the meeting between North Korea leader Kim Jon un and Donald Trump. The result of which is that North Korea has apparently pledged to disarm its nuclear arsenal. Similar agreements have been made and conveniently broken in the past. The equity markets showed little reaction to the news.

Sterling took another hit on Monday as the latest economic data continues to paint a dull picture of the UK economy. Construction orders fell by 4.6% in the first three months of the year, which is likely to be a further drag on economic growth. Brexit once again takes the brunt of the blame for the weakness. According to the National Institute of Economic and Social Research, the UK economy grew by 0.2% from March through to May. A slight improvement on the first quarter of the year 0.1%, but below forecasts of 0.3% for the second quarter. This data suggesting the UK economy is not going to rebound as much as expected in the second quarter will reduce further the chance of any interest rate rises in the coming months. What may become a problem for the Bank of England is if inflation again ticks up. Later, on Wednesday we get the latest inflation data. The concern for the Bank of England if we get weaker growth and a tick up in inflationary pressures, not an easy combination.

Brexit continues to dominate UK headlines as Theresa May goes back to parliament to overturn the House of Lords amendments. All this politicking cannot help the ability of the British Government to negotiate with Europe.

Today sees the start of the two-day meeting of the FOMC which will culminate in the latest interest rate announcement on Wednesday evening. Treasury yields dipped a week or so ago on trade tariff fears, however, have now returned to the levels before the increased concerns. The latest US inflation data has probably reinforced the Fed’s conviction that rates should move as the rate accelerated to the fastest pace for 6 years in May.

One other piece of anecdotal evidence for the state of investor sentiment, particularly for Europe, comes from the German ZEW survey. The reading fell to its lowest level since 2012 on Tuesday. The survey is based on responses from 300 experts from banks, insurance companies and financial departments. As a contra-indicator for where markets might be heading it can be a useful tool. The most bearish reading came late 2008, One of the most bullish readings in recent times was in March 2015 just before the Dax fell approximately 15pct.

Posted on June 12, 2018 .