Markets were still suffering with a bad case of post-referendum heebie-jeebies up until just over a month ago. An alien arriving from Mars, bombarded with sensationalist media and predictions of doom, would have concluded the end was nigh. July saw sanity restored, however, as investors and commentators recognised change will be gradual. In the meantime, the world continues to turn.
Following David Cameron’s resignation, the ruling Conservative Party selected a new Prime Minister in Theresa May, who in turn has appointed a largely new Cabinet. This was achieved with commendable speed, albeit with a few casualties and bruised political egos along the way.
New Brexit minister David Davis has indicated the UK should be ready to invoke Article 50 of the Lisbon Treaty and give the EU formal notice to quit by the end of 2016 or the beginning of 2017. There will then begin up to two years of intensive divorce negotiations. The political and diplomatic ground-laying process has already started.
Central bank policy continues to have a strong influence on market behaviour. Low interest rates and quantitative easing drive bond yields down, causing managers to look elsewhere for sources of income, whether interest payments from higher risk bonds, dividends from equities or rental streams from property.
The Bank of England, having left monetary policy unchanged in July after the referendum, took the decision to halve the Bank Rate to 0.25 per cent – the first change since 2009 and in the opposite direction to which governor Mark Carney was guiding us only nine months ago.
In the US, domestic economic (especially employment and consumption) data has proved fairly resilient but the Federal Reserve continues to dither, indicating it is minded to increase interest rates and then doing nothing about it. It certainly could not be accused of strong leadership. And now we are only four months away from the US election and the rising alarm – groundless or not – that Donald Trump is a real contender. Another reason for the Fed to procrastinate? Who knows.
Most central banks of the world´s major developed economies are managing monetary policy to a 2 per cent inflation target. This is proving highly elusive, partly because a period of two years´ worth of weak commodity prices has created deflation, though there are balancing upward price pressures elsewhere such that the headline inflation rate for most of these economies is around zero.
Over the past few months we have seen a partial recovery in commodity prices. One barometer is Brent Crude oil: $125 a barrel two years ago, it hit a bottom of $28 in January and recovered to around $50 by the end of May. $50 is an economically sensitive price for many producers and it is notable the number of production rigs in North America (the US is the world´s biggest producer) troughed at 447 units in May and has increased steadily to 612 at the time of writing as mothballed uneconomic capacity has been restarted.
Cash-strapped producers in a competitive industry just cannot help themselves. Inventories have begun to rise again, adding to the glut, and the price reacted accordingly, falling back to $42 before rebounding towards $50 on the suggestion of oil supply freezes from some of the major exporting nations. Oil is not out of the woods yet.
World equity markets took a sharp knock immediately after the referendum, subsequently rebounding as nerves were calmed. That, on top of the significant volatility experienced in January and February when investors were troubled about the outlook for a global economy mired in debt and the increasing ineffectiveness of central banks to be able to deal with it, has made for a volatile eight months.
Indeed, among major global equity markets, the FTSE 100 and 250 indices are both still 2 per cent to 3 per cent below their respective 2015 peaks, Japan´s Topix index is down 23 per cent and the S&P500 is only up 2 per cent.
John Chatfeild-Roberts is head of strategy for the Jupiter Independent Funds Team