The Global Month Ahead – An insight into August 2012

Financial News

7IM The Global Month Ahead - An insight from Seven Investment ManagementIn our regular feature Seven Investment Management (7IM) look forward and assess what the month ahead might hold for the world’s largest economies.

Whether you are invested in the UK or overseas, in stocks and shares or fixed interest assets, read on to discover the latest insights from one of the UK’s most respected investment managers.

We’d love to hear your thoughts, why not leave your comments at the end of the blog?

United Kingdom

Issues Outlook
With the Asset Purchase Program increased to £375 billion in July, it is unlikely that another expansion in monetary policy will be seen before Q3 GDP growth data is released in October. The Bank of England (BoE) took action recently and although current economic indicators are dismal, much of the bad news has been accounted for. With the current £50 billion of purchases ending in November, the end of 2012 is a likely time for more stimuli. It would need a real external shock for the BoE to take further measures in September.
The Bank of England releases its Quarterly Inflation Report on the 8th August, and once the euphoria of the Olympic Games is over (on the 12th), people will begin to worry about the state of the UK economy once more. This is especially true given the preliminary estimate of a 0.7% fall in GDP growth over the 2nd quarter of 2012. The title of the Report is misleading as it will be growth, rather than inflation, that most people focus on. Previously most of the blame for poor growth has been placed on external factors such as the Eurozone crisis. However, the persistence of poor data could indicate more fundamental domestic issues affecting the UK economy – although the report will probably not highlight these explicitly.

North America

Issues Outlook
The Federal Open Market Committee (‘the Fed’) announced no new policy measures at its most recent meeting but it did say that “The Committee will closely monitor incoming information…and will provide additional accommodation as needed to promote a stronger economic recovery.” This statement could well be important (although it does beg the question of what exactly the Fed was doing beforehand, if not monitoring incoming information); it suggests that the Fed is actively looking to ease – they just need an economic reason to justify doing so.
As November draws closer, the elections loom larger and larger, distorting the presentation of the real economic situation of the USA in favor of attention-grabbing party political headlines. An increase in Quantitative Easing, or indeed any significant policy change from the Fed will most likely come at the next meeting in September, as the October meeting is only 10 days before the election.
President Obama and Mitt Romney are locked in a dead heat statistically, according to US opinion polls. Mr Romney’s image could suffer due to questions over his business conduct and tax returns; whereas Mr Obama is vulnerable if the economy takes a dramatic downturn.

Europe ex UK

Issues Outlook
The European Central Bank followed the Fed and the BoE and announced no new policy measures in the most recent meeting, instead placing the onus on struggling governments to ask for help. The lack of obvious and immediate action by President Mario Draghi and the Governing Council masks the fact that policymakers are playing a longer and deeper game. Putting the emphasis on the countries reinforces the message that the ECB will not be providing get out of jail free cards, without something in return – namely a greater commitment to sustainable fiscal policies.
Mr Draghi’s statement and responses to questions following the meeting were very telling. One assertion in particular set the tone for the entire session; “the Euro is irreversible. It stays…it is pointless to bet against the Euro. It is pointless to go short on the Euro.” Straightforward, unambiguous and a clear warning. Just because the ECB was not taking action does not mean that it is incapable of doing so. Indeed, the ECB has reinforced its credibility by not bowing to market pressure, yet remaining committed to action. It would be wise to heed the message behind Mr Draghi’s words – the ECB may be heavily outnumbered by individual investors in the market, but it will never be outgunned. “The Euro is irreversible.”

Other markets

Issues Outlook
China has had a slow start to the year by its standards, growing 7.9% in the second quarter, the slowest since the height of the financial crisis. Analysts have been concentrating their hopes on a strong second half of 2012, but July’s manufacturing PMI number was 50.1, (with anything below 50 indicating contraction). Things may not be quite as bad as they seem – if weak demand from abroad caused the slump in China’s factory production the problem may be cyclical not structural. Additionally, the top level of government in China is about to change, and the indications are that the outgoing 17th Politburo Committee want to hand over a growing economy. Monetary policy is loosening and we are likely to see other measures in the coming months.
Former UN secretary general Kofi Annan has resigned from his position as peace envoy to Syria, citing the lack of action from the UN Security Council as a main reason, along with the increased militarisation of both sides within Syria. Russia and China’s refusal to condemn the Assad regime in Syria has raised spectres of the Cold War, causing the USA to be cautious in its approach towards the conflict. The likelihood of a peaceful, political resolution has vanished, and once the Olympic Games have finished, public attention will focus on the familiar tussle between the East and West.


Present Situation Next Meeting Expectation Source
Bank of England 0.5% 5 & 6 September No action until November Click here
US Federal Reserve 0% – 0.25% 12 & 13 September Last chance to ease before the election, but unlikely to take action Click here
European Central Bank 1.5% 6 September Mr Draghi is unlikely to be bound by calendars – events will drive policy action. Click here

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