3 August 2017

Approaching the precipice?

Markets are enjoying more of a holiday mood now we are into August. While it is not a one way street, generally any overall setbacks are made up for fairly swiftly.

There will, though, be a lot for investors to consider as the month unfolds. As well as some preliminary economic indicators in the form of Purchasing Managers’ Indices (favourable, so far as the UK’s manufacturing sector is concerned), the Bank of England’s Monetary Policy Committee, which sets interest rates, is meeting, so all eyes will be on any indication of a change of tack, which on the face of it seems pretty unlikely.

And there have been plenty of company results to take into account, with heavyweights such as HSBC and BP leading the way. So far most of the surprises have been on the upside, though the news that British Gas is to increase electricity prices by 12.5% did cause something of a storm, both in the media and in Westminster. Oil has also staged a modest recovery, which will be welcome in some quarters, while mining shares have benefitted from stronger metals prices.

Moreover, the pound seems to have stabilised against the euro. The recent recovery has been modest, it is true, and may owe more to increasing concerns that the rise in the value of the euro, particularly against the dollar, may be going too far. The German share index has suffered recently as a consequence. Quite how to judge the right relationship between sterling and other currencies without knowing what Brexit looks like is impossible, but the euro has felt like a safe haven currency for much of this year. Indeed, a weak dollar has buoyed American shares to new highs, in stark contrast to the German experience.

Yet executive dysfunctionality in the United States continues, with more sackings and the President’s legislative programme bogged down in Congress. Generally speaking, markets do not like the kind of uncertainty created by such a situation, but investors appear to be ignoring these concerns. Perhaps they believe a business friendly president will triumph in the end. Or could we be approaching the end of a long bull market over there?

This particular bull run commenced some eight years ago, so we look like heading for the record books. US shares do not look cheap, but that is not to say a major setback is inevitable. Aside from anything else, the alternatives do not look too enticing. Interest rates remain low and concerns remain over the future of bond markets as monetary easing comes to an end. Perhaps the best advice is to sit back and enjoy the summer, but remaining in a watchful mood.

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