Weekly Market Update: Trump questions Fed policy

Read our full Market Update Week 29

Market Update

Sterling took another hit last week as lack of government unity surrounding Brexit saw the currency fall -0.7% vs USD, -1.1% vs EUR and -1.5% vs JPY. These moves increased returns on overseas equities for UK investors, with Japanese equities leading the way with +2.3% and European equities also performing well, up +1.6%. In total global equities were up +1.0%, with US equities up +0.8%. Emerging Market equities managed only +0.3%, with UK equities little changed, gaining +0.2%. On a sector basis Financials lead the way, with Energy stocks struggling, although given we have entered earnings season returns within sector have been more company specific. So far this quarter has seen a further trend of positive earnings surprises, although there have been some notable negative outlooks. Concern over Brexit spread to government bonds, with UK 10Y Gilt yields falling -8.8 bps despite US 10Y Treasury yields increasing +1.1 bps and German 10Y Bund yields falling only -1.1bps. In US Dollar terms both Gold and Oil fell -0.8%.

View From The Desk

Last week President Trump stated his public objection to the Fed hiking rates, hinting at a less independent Fed than in recent decades. Modern economies always strive for more independence from government regulation. Nevertheless, as economics remains inextricably linked to politics, the state still maintains control of three key levers: Regulation, fiscal policy and monetary policy. To avoid too much interference with markets, monetary policy has been left to independent central banks. The US Fed has been independent in setting interest rates since 1951 and the Bank of England since 1997. However, the question of central bank independence was easier when their task was rate setting. In a monetary era, the ability to virtually print wealth and the probability of causing inflation (a very political problem throughout history) has made state actors very nervous, especially given the size of quantitative easing. So far markets have remained unfazed. While the Treasury Secretary stated that the President supports an independent Fed, the theme of limiting central bank authority is becoming more and more relevant, and we may only be seeing the start of a debate which could affect risk assets down the road.

George Lagarias, Senior Economist