In 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.
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|As one political hurdle fades out of public consciousness (Scottish Referendum, anyone?), another one appears on the horizon.||We are rapidly approaching the next General Election in the UK. The main political parties have been presenting a united front on Scotland for the past few months, and will now begin springing apart with fury. The political campaign is going to be condensed into about a six-month period, which may cause some uncertainty in financial markets while sweeping statements are considered and weighed.|
|The Bank of England has been relatively quiet during the summer months, but rate rise speculation is increasing.||The UK economy is showing some signs of slowing its growth rate, but no-one is quite sure of the indicators that the Bank of England is monitoring. Speculation on the timing of a rate rise will impact the value of the Pound, and so in conjunction with the political noise, sharp currency movements and trends seem likely.|
|On the day before Halloween we will see Q3 GDP figures from the United States. Forecasts are for a growth rate of around 3%.||It seems as though the wind is back in the sails of the US economy. A growth rate of 3% is a reasonable estimate, and would probably be enough for markets to begin to digest the possibility of an interest rate rise sometime in 2015.|
|Employment data seems to be improving, with the rolling three month average of Non-Farm Payrolls data now solidly above the 200,000 level since April. Many central bank watchers feel that Janet Yellen’s focus during her time as Fed Chair will be on reducing unemployment.||With that in mind, employment data may be the most important economic release to follow. At the moment, unemployment in the US is falling in part due to the participation rate declining as well. If we reach a point where the participation rate rises while unemployment falls, then Ms Yellen may turn her attention to inflation. This situation is unlikely to occur within the next few months though.|
Europe ex UK
|Mr Draghi’s announcement of Asset Backed Security (ABS) purchases probably means that the November European Central Bank (ECB) meeting will be quiet. That doesn’t mean there will be nothing going on behind the scenes however…||The ABS and Covered Bond purchase programme is the ECB’s first step towards increasing their balance sheet by €1 trillion. However, perhaps because the underlying instruments are quite complicated, the market reaction was quite negative. We believe this will turn out to be a situation like that of the first Long-term Refinancing Operation announcement (providing banks with very cheap funding), scorned by the market at first, until the impact was actually noticeable. Once equity markets understand that Mr Draghi is beginning to do “whatever it takes” a rally should follow.|
|The second round of the Brazilian elections takes place at the end of October.||In the first round, the centre right challenger, Aecio Neves secured 33.5% of the vote, compared to 41.6% for the incumbent Dilma Rousseff. This was a surprise gain for the pro-business Mr Neves, well above what had been predicted in the polls. Markets rose 5% on the news, but we remain concerned that the end of the month could see the index fall back once more.|
|The Bank of Japan (BoJ) has confirmed that it will continue to expand the monetary base of the economy by half a trillion US Dollars per year.||The BoJ also downgraded its growth forecast for the Japanese economy. The question is whether this will lead to a further commitment to stimulus in the next few months. At present the weak Yen is impacting household consumption more than monetary assets are inflating wealth, so the BoJ may have to be careful with its strategy from here.|
|Present Situation||Next Meeting||Expectation||Source|
|Bank of England||0.5%||9 October||No action||Click here|
|US Federal Reserve||0% – 0.25%||4 November||No action||Click here|
|European Central Bank||0.5%||6 November||No action||Click here|
The views expressed in this document are for information only and do not constitute investment advice.
Before considering investments we recommend that you consult your adviser who can assess your personal circumstances and objectives.
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