Monthly Investment Update July 2016

Monthly Investment Update July 2016In our latest monthly investment update for July 2016, we look at how the investment markets, global economy and commodity prices are performing following Brexit.

The FTSE 100 index of leading UK company shares finished June at 6,504.33, up by 273.54 points or 4.39% during the month.

It was a volatile end to the month for global equity markets, with the UK’s decision to leave the European Union creating uncertainty.

Despite sharp falls in the days following the outcome of the referendum, UK stockmarkets recovered strongly, to end of the month at their highest level for nearly a year. This strong performance followed signals from Bank of England governor Mark Carney that interest rates could be lowered this summer, along with additional monetary stimulus.

The FTSE 250 index, which is more representative of British companies and prospects for the British economy, remains lower than its pre-Brexit level. It finished June at 16,271.10 points, down 805.2 points or 4.72% during the month.

In contrast to a recovery in equity markets, pound sterling has continued its post-Brexit weakness and came close to a 31-year low against the US dollar, at $1.33.

Brexit is likely to have an impact on the United States too, with any flight to safety driving the yield on US Treasuries lower and potentially resulting in lower interest rates, boosting the value of the US dollar.

Analysts at Goldman Sachs , Barclays and Bank of America have lowered their forecast for US economic growth in light of Brexit. Their economic growth forecasts were lowered due to the uncertainties prompted by the vote and global stock market selloff. Economists expect a small net drag on US growth.

House prices rose slightly in June, according to the latest House Price Index from Nationwide Building Society. The figures were published before the impact of the Brexit vote, which is expected to dampen enthusiasm for property transactions.

Average house prices rose 0.2% during June, resulting in an average property price to £204,968. Prices rose by 5.1% on an annual basis, up from annual house price growth of 4.7% recorded in the year to May.

Nationwide warned it would be difficult to assess underlying levels of demand for housing at the moment given the distortions caused by changes to stamp duty earlier this year and the potential upcoming problems caused the EU referendum.

The UK lost its coveted AAA credit rating following the Brexit vote. Ratings agency S&P made the two notch downgrade to AA, citing “a deterioration of the UK’s economic performance, including its large financial services sector”.

Ratings agency Fitch also downgraded the UK sovereign credit rating from AA+ to AA, due to an “abrupt slowdown” in economic growth predicted in the short-term. Moody’s has cut its outlook for the UK credit rating to negative.

Interest rates remain on hold at 0.5%, with Bank of England governor Mark Carney hinting at at new monetary stimulus following the Brexit vote. The Bank is expected to cut interest rates and inject more liquidity into the economy using quantitative easing.

Price inflation as measured by the Consumer Prices Index (CPI) remained unchanged at 0.3% in the year to May. According to the Office for National Statistics, inflation was kept low due to a fall in the price of clothing which offset rising transportation costs.

Price inflation as measured by the Retail Prices Index (RPI), which includes some housing costs, rose to 1.4% in the year to May from 1.3% the previous month.

Markets are expecting higher price inflation as a result of the referendum decision, with the weaker pound likely to make imported goods more expensive. As a result, the long-term inflation outlook has reached its highest level since January.

Oil prices continue to hover at around $50 a barrel, helped at the end of June by an expectation of a tighter physical market in the future. Further monetary easing should also support commodity markets, and the Organization of the Petroleum Exporting Countries (OPEC) expects demand for its supplies to be higher over the coming months.

The benchmark 10 year UK Gilt yield stands at  0.867% at the end of June, falling sharply during June as investors made a flight to safety following the Brexit vote.

£1 buys $ 1.33060 or €1.19800. The Forex Gold Index is $1320.75/oz and the Silver Index is $18.36/oz.

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