Tatton Weekly: Change of direction or gradual normalisation?; Solid global Q4/17 earnings versus jittery markets; Budget boost for the UK’s treasury; The end of the “Fed Put”?

Change of direction or gradual normalisation?

The end of the low volatility goldilocks stock market environment has been unnerving for investors, but it has also triggered a fascinating debate amongst economists and market strategist about where we may be heading from here. As a result I have had the dubious pleasure of having to analyse and read even more than usual, although at least it has been more stimulating than the previous endless musings whether markets had once again fallen into a state irrational exuberance – or not.

Solid global Q4/17 earnings versus jittery markets

Arguably, one of the key drivers behind the quick (if partial) recovery from the recent stock market correction has been the consistent growth in corporate earnings. While stock markets saw a sudden spike in volatility, the corporate earnings reporting season for Q4/2017 carried on in the background and painted a picture that looks at odds with falling equity valuations.

Budget boost for the UK’s treasury

Some good news for the UK Treasury this week. On Wednesday, it was announced that unexpectedly high tax revenue in January meant the budget deficit had fallen to its lowest level since before the financial crisis. The government has borrowed £37.7bn over the past 10 months, which is £7.2bn less than over the same period a year ago and puts the Treasury on track for the lowest budget deficit in 10 years for the 2017-18 financial year. To put the cherry on top, the Office for National Statistics (ONS) showed how productivity growth was much stronger than expected in the fourth quarter of 2017, making the last six months of last year the strongest for productivity growth since before the crisis.

The end of the “Fed Put”?

With the early February stock market sell-off widely blamed on rising yields from returning price inflation, the release of the minutes of the US central bank’s rate setting committee on 31January were even more in the focus of investors than they are normally. So, why is it that stock markets pay so much attention to central banker actions, when an outsider would struggle to see the significance for stocks of small incremental changes to the interest rate at which banks can borrow short term funds from the central bank? We discuss and explain below why it is that markets have come to ascribe so much relevance to the rate setters as they have.

Please click here for the full Tatton commentary.