Market Commentary: Quarter 1 2018 May 2018

Market Commentary: Quarter 1 2018

The UK economy lost momentum in the first quarter, as evidenced by softer investment and employment intentions, lower new home buyer enquiries and reduced business and consumer confidence.  The Bank of England left interest rates unchanged, but hinted that rates may need to rise further to combat high levels of inflation.  On Brexit, the UK agreed a transitional deal with the EU, conditional on the UK finding a solution to the Northern Ireland Border issue.

The euro area continued to perform strongly, but leading indicators suggest that momentum has eased since the start of 2018.  After nearly six months of negotiations following German national elections, Angela Merkel succeeded in forming a grand coalition with the SPD party, a pro-European party, and entered her fourth term as Chancellor.  In Italy, national elections in March led to inconclusive results.  There was a surge in support for Eurosceptic parties, but not enough to deliver a majority in government.

In the US, activity continued to firm, with strong business investment, supportive consumer spending and an added boost from fiscal stimulus.  The Fed lifted interest rates by 0.25%, in the context of stronger domestic and global growth, bringing the Fed funds rate to the range of 1.5% to 1.75%.  The US imposed tariffs on steel and aluminium imports, prompting threats of retaliatory tariffs and worries over a global trade war. However, exemptions were granted to certain trading partners, including the EU.

In China, growth remained robust with policy focused on the quality of economic growth and on financial stability.  The government has recently restrained credit growth and moderately increased funding costs for the real economy.  In Japan, the economy has gained momentum since last year, largely driven by a recovery in exports and manufacturing activities.

Key takeaway
What should investors do in response to these developments?

Many investors change their portfolios in a bid to take advantage of the latest news. However, it’s very difficult to time these changes effectively.

In practice, shifting your portfolio in response to short-term events may lead to little more than increased trading costs.  We believe that investors will usually be better served by identifying the appropriate asset allocation to suit their goals, then sticking with it and tuning out short-term noise.

Market commentary provided by Vanguard - Quarter 1 2018

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