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Press Release

21 December 2018

Market turbulence continues post UK and US central bank meetings

James Andrews, Director – Head of Investment Management, comments on market reaction to interest rate decisions in the US and UK.
 
“The negative fallout from the Federal Reserve (Fed) meeting on Wednesday continued yesterday, helped by Trump’s push for Mexican border wall funding as part of agreeing to any government spending bill, seeing the government closer to a shutdown this evening.
 
“Despite guidance on the US economic outlook being fairly good, the market has remained laser-focused on the Fed’s balance sheet contraction and the normalisation of policy rates.
 
“It wasn’t a surprise to see the Fed raise rates and remain on course in reducing the Fed’s balance sheet. Jerome Powell himself said a consistent message helps investors. However, the market had been hoping for an indication of respite from quantitative tightening, which looks to be as bad for markets as quantitative easing was good.
 
“What’s playing out is fairly simple. As the ‘risk-free’ rate rises, you are going to demand more return for taking risk or otherwise want to pay less for that risk. At the moment, the market seems set on paying less. Not surprising perhaps, given that history tells us the Fed doesn’t usually get these things right. Since 1950 we have had 13 US rate hikes cycles, 10 of which have resulted in recession.
 
“Closer to home, the Bank of England (BoE) kept rates on hold as it acknowledged that the economy has weakened. Despite wage growth and lower oil prices which should be positive factors, these do not outweigh those indicating a slowing economy.
 
“The BoE flagged that Brexit uncertainty is restraining investment, while retail sales growth had weakened and export growth had slowed. They highlighted that monetary policy could move in either direction based on what kind of Brexit we get.  It seems the BoE has also concluded that Brexit has become very much a binary issue, where a ‘No Deal’ Brexit will lead to further pressure on the Pound, economy and UK domestic stocks in the short term.
 
“We expect markets to remain under pressure for some time to come.”
 
Ends

Notes to Editors

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Market turbulence continues post UK and US central bank meetings
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