June market review – rising oil prices, EU trade tariffs and UK interest rates

Andrew Milligan

As we move into the second half of the year, Andrew Milligan, Head of Global Strategy at Aberdeen Standard Investments, discusses what’s driving markets including Trump’s tweets, trade tariffs, Brexit and rising oil prices. He also considers whether the Bank of England will finally raise UK interest rates.

Trump’s twitter feed sends shock waves around the globe

President Trump continues to follow through on all his campaign promises and, quite rightly, investors are concerned about the potential implications of his actions.

Operation ‘Make America Great Again’ involves a whole series of steps: on tariffs, on military policy, on relations with its allies, on controlling technological flows and on tackling immigration. Financial markets are trying to understand the impact of these multiple changes on a whole range of affected companies so that they can price shares correctly. This is a task made even trickier by the 140 character limitation of a tweet, which doesn’t allow much room for the all-important details.

The uncertainty caused by President Trump’s tweets is one of the reasons why day-to-day volatility in financial markets is higher in 2018 than in 2017. On days when investors focus on the strong economy and company profits we see share prices rise, and when politics dominate the headlines we see many investors retreat to the sidelines.

Oil prices have risen for a multitude of reasons. These include:

  • US pressures on supply from Iran
  • supply disruption in other countries such as Libya
  • continued demand from some of the major economies

We know what this can mean at the petrol pump, so dampening demand for a range of consumer stocks, but from a market perspective it is interesting to see that the FTSE® 100 index is broadly flat year-to-date. Where we do see the effects more clearly is the sector level, for example oil-related companies are generally out-performing industrial stocks.

What does a strong dollar mean for emerging markets?

Historically a strong US dollar has been negative for emerging markets. However, things aren’t quite as cut and dry as they used to be. On the one hand, the rise in the US dollar does cause problems for a company or government that’s borrowed in dollars. That’s because they’ll need more of their local currency for the interest payments on the debt.

On the other hand, one of the reasons the US dollar is rising is because the US economy is so strong that the central bank is raising interest rates – and strong US consumer and business demand will strengthen exports from many emerging market economies.

So yes, the recent rise in the US dollar has dampened enthusiasm for emerging markets, but it’s worth noting that the fundamental situation is a lot better than in previous emerging market crises. All in all, there will be winners and losers at a country and sector level which investors can certainly look for.

Brexit and the UK stock market – a good time to invest?

At Aberdeen Standard Investments we prefer other global stock markets to the UK. This is partly related to Brexit; not just the political uncertainty that surrounds it but also the fact that the economy is growing more slowly since 2016 and company profits aren’t growing as fast.

However, there are a number of other factors we’re paying attention to. For example, the UK market has a large allocation to slow-growing sectors, such as banks or consumer related stocks, and has less presence in faster-growing areas, such as technology. We believe the current sector composition of the UK market isn’t as attractive as some other parts of the world.

UK interest rate rise – will they, won’t they?

The Bank of England has once again signalled there could be an interest rate rise in August. And while we’ve had mixed messages from the Bank of England so far this year, we believe the probability of an August rate rise is high – but as this is largely priced in already, the impact on the economy should be low.

At Aberdeen Standard Investments, our fixed income team continuously monitor these issues. They note that the bond markets are currently pricing in about a 65% probability of the Monetary Policy Committee (MPC) raising rates at its August MPC meeting, with three rate hikes priced in over the next three years. So inflation surprises and an aggressive MPC response would be needed to surprise the markets.

The information in this article should not be regarded as financial advice. Please remember that the value of your investment can go down as well as up and may be worth less than you paid in. Information is based on our understanding in July 2018.