31st July 2019: Investment & Economic Update

What’s happening this week in the markets? We summarise the news from around the world.

In the UK, headlines have been dominated by the UK Conservative Party leadership contest, with Boris Johnson beating Jeremy Hunt, as expected, with 66.4% share of the vote. Johnson said his priorities were to deliver Brexit, unite the country and defeat Jeremy Corbyn, as well as “energise” the country. He immediately set about reshaping the Cabinet, with 15 ministers either resigning or being sacked. In his first speech as prime minister, Johnson vowed that the UK would leave the UK on 31 October “no ifs or buts”.

The pound has continued to edge lower on currency markets as the government insists that the UK is prepared to leave the EU without a deal. The pound - which was trading at $1.50 against the dollar before the EU referendum in June 2016 - has dropped by 2.4% since Monday (currently sitting at $1.22) when a spokeswoman for Number 10 said that the UK would not enter talks with Europe unless the co-called Irish backstop is scrapped.

She said that because the EU has said it is not willing to renegotiate on this point, "we must assume there will be a no-deal Brexit on 31 October." 

In other news…

  • At 2.1%, US GDP in the second quarter of this year beat expectations. This figure was driven primarily by personal consumption, proving that the US consumer continues to function as the proverbial motor to the US economy at present. Government spending also contributed to growth, but it is questionable whether spending can be sustained at its current higher levels.
  • US growth will certainly be a talking point in the US Federal Reserve (Fed)'s policy meeting on Wednesday, not least because all other components of the growth data had a negative impact. Net exports, manufacturing inventories and private investment were particularly weak, showing the effects of ongoing US-China trade disputes and the impact of a strong dollar on American companies' competitive position. Markets widely expect an interest rate cut from the Fed this week.
  • In Europe, the outgoing European Central Bank (ECB) President Mario Draghi stated that the European economic picture " is getting worse and worse", referencing the news that German manufacturing data had hit its lowest level in seven years. Survey data charting business optimism in the eurozone also fell to readings not seen since 2009, which raised markets' hopes that the new ECB president will embark on a path of accommodative monetary policy before the end of the year.
  • Following his sacking of Turkey's central bank president some months ago, President Erdogan expressed satisfaction at the interest rate cut enacted by the new incumbent, Murat Uysal, but said more needed to be done.

What to look out for this week

  • In the central bank calendar, the Bank of Japan meets on Tuesday, the US Fed on Wednesday, and the Bank of England on Thursday. All eyes will be on the Fed, where a rate cut is expected.
  • A spate of data releases are due across the developed world, and the corporate earnings season continues in the US.
  • This week's headlines will likely be dictated by US-China trade talks, which resume as the US delegation travels to China today.


Source: Heartwood Investment Management

Nothing in this communication constitutes advice to undertake a transaction and professional advice should be taken before investing. Any observations are Heartwood’s commentary on markets and its own investment strategy. This material is not investment research and the content should not be treated as an offer or invitation to buy or sell securities. Past performance is not a reliable indicator of future results. The value of investments may fall as well as rise. Changes in exchange rates between currencies can cause investments or income to go up or down.


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