Market Update 19.05.15

IpsoFacto Investor market update

On the day when deflation officially hit the UK, the UK stock market (FTSE 100) closed today (19.05.15) at 6995, more or less unchanged since 01.05.15, a slight underperformance against the US and major European markets. The main impact of the surprise decisive result in the general election seems to have been in the foreign exchange markets, where the pound, at least initially, reversed some of its political nerves. It has fallen back a little over the last two days v. US $ but still stands at $1.554 currently. The rate v. Euro is 1.39. Ten year gilt yields have risen slightly since the beginning of the month, but this is largely in line with international markets, although the big movement upwards in yields (and hence fall in price) has been in German government bonds. Bond markets had experienced a mini temper tantrum as investors looked forward again to US rates going up; but they appear to have settled down again now.

So, with all the political excitement out of the way, for the moment, what are the prospects for the UK market? Deflation has been flagged for some time and should not be a concern; unsurprisingly, transport costs and food prices were a major influence on the CPI (Consumer Prices Index) falling by 0.1% in April. Oil prices have recovered since the early Spring, but it probably won’t be until the Autumn that we see this effect on the inflation figures, if the price remains at current levels, that is. According to Bank of England Governor Carney: “over the course of the year, as we get towards the end, inflation should start to pick up towards our 2% target”.

The Governor of the Bank of England Mark Carney speaking last year.

We are still at that frustrating stage of not knowing whether the US economic recovery has really stalled or, as many suspect, the first quarter GDP numbers were somewhat of a blip and we should see stronger growth coming through. Equally some good figures from Europe – the French economy grew by a relatively healthy 0.6% in the first quarter (considerably ahead of the UK) may be no more than a temporary stimulus from low oil prices and the weaker Euro. It is not yet clear whether the nascent European recovery can be maintained and take over some of the heavy lifting for the global economy from the US.

Despite a disappointing first quarter, data concerning the UK economy has been showing renewed vigour and, at least in the short term, we should see a boost from the election result. The more UK focused stocks in the mid and small cap arenas should benefit. But for the UK market as a whole, not much has really changed since our last Newsletter, other than the effect of a stronger pound on international stocks.