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A vote of confidence in the economy

An eventful week has calmed fears about future political and economic instability

Topic: Economy

It could have been five days that rattled the growing confidence of investors across the world, but it ended with markets at record highs and an unexpected spike in the value of the pound.

In a week that saw the Dutch elections, the Queen’s ‘royal assent’ for triggering article 50 and a rise in US interest rates, no one wanted to rock the boat and upset the current climate of economic optimism. So why has such an eventful medley of political and economic events left investors unfazed?

Monday: The Queen’s royal assent for triggering article 50
The Queen gave her approval to the government’s amended Brexit bill, kick-starting the official process that will eventually take the UK out of the European Union. The agreement only reinforced expectations that triggering Article 50 will not have as much of an impact on markets as the actual details of the deal itself. The sooner exit fees and trade arrangements are ironed out, the better it will be for investors.

Wednesday:  The Dutch election
The Dutch election saw the Netherland’s very own Nigel Farage (Geert Wilders) defeated by Mark Rutte. It suggests that Europeans are pushing back against the tide of populism or, as Rutte put it: “the Netherlands said Whoa!”

Many saw the Dutch election as a precursor for the upcoming German and French elections, where a win for far right candidates could threaten the very life blood of the European Union. Perhaps interpreting Rutte’s win as a sign of things to come, markets rallied across Europe.

Wednesday: The Fed Rate Rise
Responding to a healthy jobs market, growing salaries and rising inflation, the US Federal Reserve (the Central Bank of America) has raised its interest rate by 0.25%.

The commentary for future rises was milder than expected so the dollar fell in value, but US stocks and bonds rose overnight: the vote of confidence in the US economy seems to have whet everyone’s appetite for risk. As many companies that make up the FTSE 100 (the index of the UK’s top performing companies) make a lot of their money in America, it’s perhaps not surprising to see the index rise above 7,400 for the first time in its history.

Thursday: The Bank of England Monetary Policy Committee
The Bank of England’s team of experts got together and all but one agreed to leave UK interest rates at their current record lows.  The real story, however, was in the minutes from the meeting and the unexpected voice of dissent from one of the policymakers (Kristen Forbes), which hinted at a possible future rate rise later this year. This in itself, was enough to drive the pound up half a percent against the dollar to a two week high.

Friday: Happy Days?
So are these all signs of a global economic upturn? It’s difficult to say at this stage but it’s worth remembering that UK investors are always impacted by what’s happening abroad, so will continue to benefit from any sign of confidence in the US or European markets. But as long as there remains a lack of clarity in US economic policy and uncertainty about future European election results, investors should probably remain vigilant.

The information in this article is for private circulation and is believed to be correct but cannot be guaranteed. Opinions, interpretations and conclusions represent our judgement as of this date and are subject to change. The information contained in this article does not constitute a personal recommendation and the investment or investment services referred to may not be suitable for all investors; therefore we strongly recommend you consult your Professional Adviser before taking any action. Copyright: Investec Click & Invest Limited. Reproduction prohibited without permission.

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