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  • Stock markets were mixed last week, with Eurozone shares being the stand-out performers following a dovish announcement from their bank last week. UK shares were dragged down by the mining sector, but a weak pound did help boost the gains of overseas earners and global stocks. In a similar vein to last week, the tone for markets is likely to be driven by central banks with a big panel discussion in Portugal as well as the Bank of England’s meeting on Thursday.

    Last week

    - Stock markets were mixed

    - Bond markets were solid save for emerging markets 

    -  Central banks dominated newsflow: The US Fed hiked rates and the European Central Bank (ECB) announced a taper 

    -  Economic data was broadly strong

    - US trade tariffs announced on China

    This week

    - Similar to last week, the focus is likely to remain on central banks. The ECB is holding a forum on central banking over the next few days (until Wednesday) with all the major banks being represented.

    - The Bank of England meet on Thursday - they are expected to make no changes to interest rates and maintain them at 0.5%.
    - OPEC conclude their meeting over the weekend which will be impactful for oil markets, as will the flash PMI data which will be released for the major economies on Friday.
    Last Week's Highlights

    ​- Stock markets were mixed last week. UK stocks closed down 0.55% for the week as some of the big mining names struggled on Friday with the news about US tariffs on Chinese goods holding them back (BHP Billiton was down 5.35% on the week, with Rio Tinto down 4.49%, whilst Anglo American was down 7.27%). Global stocks were up 0.8%, with overseas returns being boosted by a weak pound. European stock markets were the stand-out performer, up 1.6% on the back of a dovish taper by the ECB and Italian risks receding.

    - Bond markets were solid in general, with more defensive bonds performing best. UK government bonds were up just over 1% for the week which helped bring them back into positive territory for the year. Emerging market bonds continued their wobble; they were down 1.6% last week and are now down 5.9% so far this quarter and down 5.3% so far this year.
    - As was widely expected the US Federal Reserve raised interest rates for the second time this year to an upper bound of 2%. Although this hike was well telegraphed, it shook the market a little as it came alongside a slightly more hawkish “dot plot” which showed that the Fed is now expecting to make four hikes in total this year (i.e. two more) as opposed to three. This is in line with market pricing, with bond futures markets pricing in two more hikes for this year, with the next one coming in September.
    - Although the Fed was slightly more hawkish than expected, markets soon recovered on Thursday, getting a boost from the ECB. The ECB announced they would reduce asset purchases from €30bn to €15bn at the end of September and stop them by the end of December. However, the ECB also vowed to wait until at least the middle of 2019 to begin hiking interest rates. This was more dovish than had been intimated in the week prior when their Chief Economist said that they were getting ready to taper. European assets rallied hard off the back of this, with the Euro currency selling off.
    - US economic data was very strong over the week. Inflation data came out on Tuesday, which showed that headline inflation in May had reached 2.8% on a year-over-year basis, its highest level since 2011. Retail sales data delivered more of an upside surprise. Core retail sales (excluding sales at automotive dealers, building materials stores, and gas stations) rose 0.6% in May, while previous months were revised higher.
    - The Bank of Japan’s (BoJ) monetary policy committee decided in an 8-1 vote to leave its easy money policies at current levels. The central bank will continue buying Japanese government bonds at a rate of ¥80trn per year, maintain its goal of keeping the 10-year bond yield at about zero, and keep short-term interest rates at -0.1% for some current account deposits at the central bank. After the meeting, the BoJ Governor Haruhiko Kuroda reiterated his statement that it was too early to discuss policy normalisation and methodology as the 2% inflation target remained out of reach.
    - In the UK gilt, inflation in May came in at 2.4%, which was in line with the April level but shy of the 2.6% forecast.  RPI came in a touch lower than expected at 3.3% and retail sales were very strong in May, coming in at an annualised rate of 3.9% (as compared to expectations of 2.4%).
    - A week in markets would not be complete without something from President Trump, with trade tariffs being announced on China on Friday. The Trump administration announced that it was following through with an earlier threat to impose tariffs on imports of $50bn worth of goods from China, which came on the top of earlier announced steel and aluminium tariffs.
    Asset Returns

    Equities & Oil: returns are all in base currency, save for Global and Emerging which are in GBP. Bond returns are all shown in GBP. Gold in GBP.

    Source Bloomberg.

    US Fed hiked rates last week for 2nd time this year – they are now at their highest level since September 2008

    Source: Psigma / Bloomberg.


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