The Global Month Ahead – An insight into August 2013

Financial News

Guest Blog Seven Investment Management 150pxIn 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
It has been a month since Mark Carney took over as Governor of the Bank of England (and since he discussed sock colours with our own Justin Urquhart Stewart on the London Underground). In his first meeting, the Bank of England surprised most people by providing explicit commentary on the interest rate expectations of the market – suggesting that the short time horizon was unrealistic. Now that the move towards providing forward guidance has been made, the impact of further commentary should be more limited, as the shock factor will have disappeared – a comment on the extent of the shift in expectation since last month seems likely. A more formal policy on forward guidance should be revealed along with the publication of the Inflation Report in the middle of August.
UK data continues to be weighted towards the positive: the Help to Buy scheme from the government is boosting home purchases; exports are rising; unemployment is falling; and there may be a shale gas bonanza hiding under the North of England. Second quarter GDP should be positive, probably around 0.5%. While economic data remains positive there might not be any appetite from any members of the Monetary Policy Committee to increase the level of asset purchases. Perhaps the effect of money printing is taking longer than thought originally, and is now being allowed to play out before further action is taken.

North America

Issues Outlook
The US Federal Reserve meets on 31 July, and there is a black-out period on speeches by the board members during the preceding seven days. We also have the Jackson Hole meeting of global Central Bankers, which is worth watching. Speeches by the members of the US Federal Reserve will continue to alternate between dovish and (relatively) hawkish throughout August, in a “left-leg in, left-leg out” pattern. In fact, the final line of the Hokey- Cokey is a good summary of Ben Bernanke’s current attitude: communication – “That’s what it’s all about!”
US retail sales figures at the end of June were somewhat disappointing, and both new housing starts and new house building slowed markedly in June. As suggested above, the Fed is likely to opt for rhetoric rather than action in August. Any decline in the appetite of the US consumer is worth being aware of, whether for shopping or for housing. The recent increase in mortgage rates may have something to do with declines of both of these, but is hopefully temporary rather than permanent.

Europe ex UK

Issues Outlook
In July’s meeting, the European Central Bank issued a statement that gave some measure of forward guidance on interest rates – similar to the BoE (above), although the market reaction was more muted. Arguably the ECB’s decision is far more important than the BoE’s just due to the difference in size between the UK and the Eurozone. Mr Draghi’s move to forward guidance uses up another one of his limited set of tools to control monetary policy; we will probably start to see talk of money printing in Europe once more. However, any explicit stimulus is still a long way off.
Economic sentiment in Europe improved slightly in July, with the composite PMI survey rising above 50 for the first time since 2011. GDP figures for Q2, released in the middle of August, will clearly lag this. Expectations for GDP growth in European countries and earnings growth for companies are at their lowest for around 2 years. However, these levels may also be the most realistic we have seen for a while – previous excitement over avoiding the collapse of the Euro led to over-optimistic forecasts, now perhaps, reality is creeping back in. The rhetoric surrounding the German elections is worth monitoring in the next couple of months.

Other markets

Issues Outlook
As we suspected last month, Japanese Prime Minister Shinzo Abe’s Liberal Democrat Party secured the Upper House with a minimum of fuss. This should pave the way for fundamental reforms to be proposed and approved. The “Third Arrow” of Prime Minister Abe’s reforms was always going to be trickiest – regulation-based growth is much harder to implement than starting the printing presses and planning government spending projects. Hopefully Mr Abe will have learnt from the negative reaction to his vague comments in May, and will now provide clear and detailed plans to re-foster growth in the long-term.
The HSBC Chinese manufacturing sentiment indicator is due on 1 August. HSBC give an initial indication, which came in at lower than expected. Given the shock delivered to the Chinese financial system in June (where interbank lending rates spiked sharply), the final reading is likely to confirm the ongoing slowdown in the Chinese economy.


Present Situation Next Meeting Expectation Source
Bank of England 0.5% 1 August No change expected Click here
US Federal Reserve 0% – 0.25% 31 July Further mention of ‘tapering’ but no action Click here
European Central Bank 0.50% 1 August No action expected Click here

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