Stock Market Correction
Written by Gavin Pannu, MSTA, CFTe
The FED raised their rates by 0.25% to 1.75% which was expected by the market. Going into the decision, the market had been focused on the future path of interest rate rises which has been stated as either 3 or 4 hikes this year. The market received confirmation that there would be just two more hikes this year. Powell’s not so hawkish press conference stated there was no evidence to suggest that inflation was going to suddenly pick up.
Sterling is up 20 cents against the dollar since this time a year ago, partly driven by growing confidence in the Brexit process. Brexit negotiations seemingly progressing well and the current economic outlook is starting to look a little brighter. The UK reached a joint legal agreement with the European Union on the legal terms of a Brexit transition deal. Brexit Secretary David Davis said the transition agreement would smooth the path to a future permanent relationship.
Recent data revealing that average pay in the UK jumped by an annualised rate of 2.8% in the three months to Jan, a sharper hike than had expected. Office for National Statistics provided new figures which shows wage growth and the unemployment rate has remained near a four decade lows. The Bank of England MPC members did maintain rates at 0.5% but hinted a hike may be on the horizon. The 9 person team voted 7-2, Ian McCafferty and Michael Saunders dissented in favour of a 0.25% rate hike. MPC members have a lot to think about before it presents the next inflation report on the 10th of May. CPI climbs to an annual rate of growth of 2.3% which remains above the Banks 2% target as inflation strengthens. Unemployment has continued to fall further and wage growth has been better than expected. Recent macroeconomic data leads us to view of a potential rate hike to take place sooner than expected.
The largest impact this week has come from Donald Trump, who confirmed the US will impose tariffs worth $50bn on Chinese products which led to a significant sell off in the stock market globally. The White House confirmed that the tariffs were in retaliation for intellectual property violation stemming from China. The US will target around 100 different products. Investors took flight on the news, Dow closing 700 points lower and more than 10% off the highs back into the correction phase. Steel and Aluminium stocks were also sharply down, while safe haven assets such as the Yen gained value. The tariffs have exempt countries within the European Union along with Canada and Mexico.
Shares in social media company Facebook slumped and brought a sell off the outperforming technology sector following allegations that the data of some 50 million users had been harvested. Shares in Facebook are down 10% and founder Mark Zuckerberg has been called to testify before Congress while MPs in the UK have summoned him to appear before a select committee investigating fake news.