The Global Month Ahead – An insight into June 2013

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
Sir Mervyn King attends his final meeting as Governor of the Bank of England this month, with Mark Carney due to assume the role on 1 July. For the past few meetings three members of the Monetary Policy Committee, including Governor King, have voted to print a further £25bn. However, following the release of the most positive Inflation Report for six years, for the MPC to take any action would be strange, and would somewhat undermine their own predictions. Expect a vigorous discussion, but still no further stimulus.
June 26 is the deadline for George Osborne to make £11.5 bn of spending cuts for the 2015-16 year – rarely have these discussions been so public. The Chancellor will have to negotiate with various government departments to find places to slash spending, and it is the powerful ones such as the Ministry of Defence and the Home Office who are likely to put up the biggest fight. Depending on how petty the arguments get, this could be more bad news for the popular view of the government.

North America

Issues Outlook
The US economy continues to show signs of life – which is giving the Federal Reserve something of a communication headache when asked about continuing monetary easing – Chairman Ben Bernanke suggested that the pace could slow at “one of the next few meetings”. Speculation about the reduction of Fed bond buying has spooked markets recently, and will in all probability continue to do so. Throughout the next quarter, we think that officials will keep bringing up the “tapering” topic, in order to let investors get comfortable with the idea, before it is actually implemented.
At present, the $85 bn a month of asset purchases remains in place, with unemployment currently at 7.5%, and a clearly telegraphed target of 6.5%, early removal would be a surprise. The Fed has openly tied its stimulus programme to the unemployment rate, one of the slowest indicators to change. This seems sensible as an anchor for expectations, and allows scope to increase as well as decrease the level of purchases. The motto for central banks will go on being “No alarms, and no surprises”.

Europe ex UK

Issues Outlook
The European Commission is relaxing its demand for a maximum 3% annual government budget deficit for France, Spain and the Netherlands, as long as they commit to labour market reforms. Last month, we said that we may begin to see more unconventional measures from the ECB in order to stimulate growth – we got the institution wrong, but the premise right. This budget deficit limit has been regularly breached in the past (even by Germany) without penalty, so the explicit statement from the EC is clearly designed to be a confidence booster. Further “flexibility” announcements from European bodies are likely.
Italian local elections see a collapse in support for Beppe Grillo’s Five-Star Movement, with no candidate in any city making the second round run-off in mid June. The “protest vote” may have faltered in Italy – voters have expressed their displeasure with politics in general, and are now looking for the people who can get the nasty jobs done. Reforms are always unwelcome, but as long as they are seen as a necessary evil, Prime Minister Enrico Letta should be able to keep his shaky coalition together over the next few months.

Other markets

The Bank of Japan made its first misstep in May, when Governor Kuroda gave a statement to the effect that he did not see Japanese long term bond yields rising. The Nikkei stock index fell 7.32% the next day. The dangers of miscommunication are becoming more apparent; in the current climate, the wrong comment from the wrong central bank official can send markets into a tailspin. Mr Kuroda’s statements will likely be more clear-cut and affirmative from now on, but markets will probably be slightly less exuberant than the first part of 2013.
Geopolitics is rearing its head again as the debate over Syria continues. After the Arab Spring in 2011, the majority of investor attention has been focussed on economic factors. However the international response to the Syrian conflict could well bring events in the Middle East back into the spotlight: Europe, Russia, the US and China all have interests (and reputations) to protect.


Present Situation Next Meeting Expectation Source
Bank of England 0.5% 6 June No action is likely – Mervyn King’s final meeting Click here
US Federal Reserve 0% – 0.25% 18 & 19 June No action unless May data is extremely poor Click here
European Central Bank 0.75% 6 June No change, due to rate cut in May Click here

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