UK government bonds caught in £-Sterling’s downdraft? 

A temporary uptick in the rate of inflation, as long as UK economic activity remains in at least a mild uptrend, can actually turn into somewhat of an economic stimulus, as the nominal growth that comes with it can create a rising tide that lifts all boats.

UK inflation up (↑) + unemployment down (↓) = growth ↑?

According to the Bank of England, 20% to 30% of £-Sterling’s recent fall will be seen in higher prices, with most of this coming within a year of the currency’s “devaluation”. Therefore, if the ongoing uncertainty around Brexit continues to negatively impact £-Sterling, we could see more pronounced and long-standing increases in inflation.

It seems reasonable to expect no further action from the BoE, unless either Sterling appreciates or economic activity levels fall markedly.

Central banks turning from heroes to villains – according to some politicians 

Indeed, we are very sympathetic to the view that loose monetary policy is not a panacea for an ailing economy. We do, however, find it somewhat exaggerated to call it the cause of illness. For better or for worse, central banks are tasked with maintaining a stable level of inflation by setting interest rates which balance the supply and demand of money.

This government has had 6 years to utilise the calm the loose monetary policy provided them with to rebuild trust and confidence in the financial and economic system their political class had been such poor guardians of. The fact they have not done so is hardly a failure on the BoE’s part.

Fears ease: China continues to reassuringly deliver on stimulating growth economic policy effectively

The rebound in growth over much of 2016 can be largely attributed to official measures to boost domestic consumption, support the housing market and bring forward large public infrastructure projects. It would appear that these efforts have been so successful, particularly for strong rises in house prices, that local governments across China have introduced measures to reign in excessive property market speculation.

It is possible that by allowing credit to expand too quickly in the short-term and managing the economy to ensure that GDP hits its target, China could be building a longer-term problem. This might be viewed in a similar way to the economic problems created by the financial crisis – a product of the US property market turbulence.

Forget peak oil supply, what about peak demand?

We are optimistic that oil will remain well under the $100/bbl level, not because of a lower demand dynamic from more energy efficient technology, but rather the aforementioned technological advancements in exploration technologies – shale oil and gas.

Emerging Markets: ‘A return to the promised land’?

While over much of 2016 commodity dominated economies experienced a strong rebound from oversold levels as commodity price stabilisation made them appear cheap, attention has now turned back to the consumer focused regions of Asia.

Investors are increasingly investing more selectively across the different regions. Although offering a great deal of promise, EMs still present a high level of risk, and now is not the time for an undifferentiated top-down asset allocation move towards all emerging markets.

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