The Global Month Ahead – An insight into December 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 article?



United Kingdom

Issues Outlook
The November meeting of the Bank of England’s Monetary Policy Committee went as we thought in last month’s piece – a reiteration that the MPC is committed to low interest rates. The criticism being levelled at the BoE may be a blessing in disguise – it allows the MPC to continually reiterate its position on monetary policy, without the need for a formal statement. Mark Carney’s public defence of forward guidance should continue throughout December, particularly in the wake of the decline in unemployment figures.
Throughout 2013, economic indicators in the UK have had a tendency to surprise to the upside. Now however, expectations may be catching up with reality – the consensus outlook is brighter, so expect fewer positive surprises. The most recent plus was the sharp decline in CPI inflation last month (from 2.7% to 2.2% annualised); the rate is likely to remain stable over the next few periods. In the third quarter, the 0.8% GDP growth was in line with expectations. Fourth quarter GDP is likely to be slightly less, at around 0.6% as the housing and construction industry slows during the winter.

North America

Issues Outlook
On December 18, the Federal Open Market Committee meets for the penultimate time under the leadership of Ben Bernanke. We do not expect an announcement of tapering in December, although there remains an outside chance. Economic indicators have been mixed since September, and the impact of the government shutdown is yet to be fully felt.
October’s debt ceiling crisis, partisan bickering and government shutdown has been swiftly forgotten, and public attention is now focussed once more on central bank policy. The Federal Reserve is in a slightly awkward position at present; the lack of tapering has reduced market confidence in central bank statements at exactly the time when Ben Bernanke (and his successor, Janet Yellen) are attempting to use forward guidance as a policy tool. Similar to the MPC in the UK, there will most likely be a number of speeches by Fed officials throughout December, emphasising low interest rates for longer.

Europe ex UK

Issues Outlook
In our last piece, we said we thought that the ECB might hold off on an interest rate cut until 2014, so were slightly surprised by Mr Draghi’s rate cut to 0.25%. The rate cut in the November meeting is likely to be the last action of the ECB in 2013. Although deflation worries are increasing in Europe, Mr Draghi is likely to address these concerns with words rather than policy. He is likely to emphasise that the ECB has other tools to combat deflation, although is unlikely to be more specific than that.
It took a 17 hour meeting, but Germany is one step closer to a government – Angela Merkel’s CDU/CSU and Sigmar Gabriel’s SPD have agreed on the terms of a coalition government. In mid December, SPD members will have to ratify the contract; there will be pressure from the party leaders to allow a government to be formed. Should the CDU/CSU/SPD manage to form a coalition, Chancellor Merkel will have to work hard to convince her partners about policy changes. However, when the parties do manage to agree, the supermajority they have in the Bundestag should ensure that any changes are enacted swiftly. Promisingly, the SPD is even more pro-Euro than Merkel.

Other markets

Issues Outlook
After a quiet summer, the issue of the Senkaku Islands in the East China Sea has started to flare up again. Within days of China declaring that the area above the islands was Chinese airspace, US, South Korean and Japanese planes all sent flights through the “restricted” zone. Although the islands themselves are barely inhabitable lumps of rock, there are two factors at play. The first consideration is the natural resources beneath the seabed – valuable for any country. The second concerns the underlying fears of aggressive expansion of territory by China; something that all of the other players in the Pacific are keen to avoid. The Chinese are unlikely to back down from the labelling of the zone, but are equally unlikely to create an international conflict by militarily enforcing the restriction.


Present Situation Next Meeting Expectation Source
Bank of England 0.5% 5 December No change in rate or asset purchases Click here
US Federal Reserve 0% – 0.25% 18 December Tapering unlikely, no interest rate change Click here
European Central Bank 0.25% 5 December Given the rate cut in November, a further cut is unlikely Click here

Seven Investment ManagementThe views expressed in this document are for information only and do not constitute investment advice.

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