Global equity markets reacted positively to the comments from the US Federal Reserve that accompanied its latest increase in interest rates with the FTSE All-World Index closing 1.41% higher. Whilst making it clear that the US will normalize rates as soon as possible, these comments were interpreted as more dovish and that further increases will be gradual. As we have noted before, it is the pace of subsequent increases that matters more than this most recent move.
Both the Bank of Japan and the Bank of England left rates unchanged. However, the interpretation placed upon the latter is of a more hawkish stance, and markets will need to adapt to higher rates sooner than has, perhaps, been expected. Tomorrow’s inflation numbers will, therefore, be watched closely. This environment still leaves bonds looking expensive. As a result, we are maintaining our preference for high quality and short duration exposure and avoiding longer dated bonds.
It has been hard to escape the political noise in recent days. The much debated Dutch elections had, unsurprisingly, a minimal impact upon markets. The talk is now focussed on the forthcoming French elections and on when the UK Government will trigger Article 50. Will these have more of an impact on markets? As with all political speculation it is hard to say. It would need a French government with a clear mandate to leave the euro to really rattle things. As for the UK, everybody knows that Article 50 will be invoked so it would hardly be a clandestine move. Sterling remains, in our view, most likely to see any impact and equity markets should be largely untouched.
We are still looking towards the future with expectations of solid global economic growth and an encouraging environment for equity markets. However, despite the current more benign mood amongst investors, we still feel that the risk of a short term pull back remains. As a result, we are retaining our slightly more defensive posture. We remain overweight in equities and have been participating in recent upward moves but we do still have a small cash position which is earmarked for reinvestment when a suitable opportunity presents itself.
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