This week, Phillip Hammond unveiled his first UK Budget since the General Election in June. The event was preceded with the usual fanfare and, just as typically, it engendered a rather muted market reaction with the FTSE 100 closing flat on the day and the Sterling versus US Dollar exchange rate broadly unchanged too. This was not for a lack of fiscal “treats”; the Chancellor found £6billion of stimulus for 2018 and almost £10billion for 2019. In all, an extra £6.3billion was found for the NHS: £3.5billion for upgrading buildings and improving care and £2.8billion for improving accident and emergency performance, reducing patient waiting times and to meet increased demand. The abolition of stamp duty for first time home buyers on properties valued up to £300,000 received the most press attention, although largely from critics who argued the move would push up house prices thus exacerbating the financial woes faced by young people. In any case, the goody bag of giveaways was overshadowed by a sharp cut to the UK’s economic outlook. The Office for Budget Responsibility downgraded the UK GDP growth forecast for 2017 from 2.0% to 1.5%. From 2018, growth is expected to average 1.4% until 2021, on a par with the snail’s pace seen during the Euro crisis.
While fiscal matters were in the spotlight in the UK, the focus in the US and Europe was firmly on monetary policy. In the US, the minutes of the last Federal Reserve meeting revealed further signals that officials are prepared to raise rates again, despite inflation continuing to undershoot their expectations. Predictably, Gold and Treasury prices slightly extended their gains. On Thursday it was the turn of the European Central Bank (ECB) to share the details of their most recent meeting. The minutes revealed broad agreement amongst officials that quantitative easing would still be required for inflation to reach the ECB’s target of “below, but close to, 2%”, but at a significantly lower rate. Chief economist Peter Praet recommended a halving of the ECB monthly asset purchase programme, from the current €60billion to €30billion at the start of 2018 and continuing to run the programme for at least nine months. Some argued for a clearer end date, but the overwhelming view was that it was most prudent “to keep the flexibility to extend the programme further if necessary.”
With three key economic powers, the US, Europe and UK on a clear path to weaning the market off monetary stimulus, what will this will mean for the nine year bull run in equities, given it owes its success, in part, to ultra-low interest rates? UBS’s view is that the tightening agenda poses little risk to stock indices’ record highs, as the process is expected to be so gradual. In fact, their outlook for equity markets is decidedly positive, arguing that in light of the broad-based and accelerating recovery “there is little from a macroeconomic perspective to suggest an elevated probability of a major drawdown in 2018”. This is economist babble for: You are unlikely to lose your shirt if you invest in the stock market next year.