22 April 2016

The calm before the storm?

Markets have been behaving in a better way than many feared, given recent weakness in Far East markets and the ongoing wrangle over what leaving the European Union might mean for our economic wellbeing.


With the debate over whether we remain or leave the EU now in official full swing, there is a danger of treating our market outlook as a single issue item, but the reality is that there is much more to take into account when surveying the financial landscape.

The collapse in the discussions over limiting the oil supply is a case in point. The oil price received a boost from the news that Russia and Saudi Arabia had reached a tentative agreement on cutting back on oil production, only to see the price plummet again when it became clear that Iran was not prepared to play ball. This is hardly surprising. After many years of sanctions, Iran is anxious to rebuild its official ties into this lucrative market. But demand simply does not match supply at present.

Meanwhile, inflation has been creeping up here at home and may yet force the Bank of England’s hand on interest rate policy, though nobody really expects a rate hike soon. However, the Office for National Statistics is indicating a rise in pay growth, as well as reporting that the Chancellor of the Exchequer is falling behind in his debt reduction programme. The economic outlook does seem to be less rosy right now, which makes the relative calm nature of markets all the more surprising.

Company news is delivering some important indicators, with leading companies in a variety of industries here in the UK all reporting results recently. In America there are still fears that corporate earnings will disappoint as the year progresses, but over there even the prospect of a Trump presidency is failing to make much of an impact. With domestic retail sales figures due, along with a steady flow of information from the Eurozone’s central bank, we won’t be short of material to mull over.

But the fact remains that it will be the referendum that dominates sentiment, particularly in foreign exchange markets, until the June date is behind us. Early indications are that the debate could well get feisty, with heavyweights on both sides accusing the other of dirty tricks. There will be other considerations to take into consideration, of course, but I fear that we are going to have to get used to this issue gaining the most attention. And the closer the referendum gets and the louder the rhetoric, the more bumpy the ride for investors.


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