Tuesday, 2 September 2014

Investors hold their nerve as geopolitical tensions deepen

Investors have held their nerve this week, even as geopolitical tensions appeared to deepen. Markets drifted along and traded within a fairly compressed range, but they remain within touching distance of all-time highs. The US continues to deliver solid economic data and comments from central bankers remain supportive, however reports from the Ukraine suggest that Russia now has troops operating across the border and this marginally dented optimism.

Investors now appear to be waiting for the next catalyst that could propel markets higher. Some believe that catalyst could come as soon as next week, as anticipation is growing that European Central Bank President Mario Draghi is set to go on the offensive and introduce a range of new tools to help bolster growth and raise inflation expectations across the continent. The Eurozone saw its inflation rate fall further in August to a fresh five-year low, of just 0.3% on an annual basis.

Another potential spark could come from the technology sector, which is gearing up for the world's largest consumer electronics show in Berlin next week. Expectations among technology enthusiasts are already running high as new products get set to arrive in time for Christmas. 

The increase in geopolitical tensions is concerning and in many cases truly tragic, but these incidents do not seem to be enough to unsettle the building economic momentum, particularly in the US and UK. Durable goods orders in the States jumped by the most on record and consumer confidence climbed to a seven-year high in August. This provides further evidence that the world's largest economy continues to strengthen.

The US Federal Reserve has stated that it is committed to supporting the ongoing recovery, even as its monetary policies are returning to normal. Here in the UK, the Bank of England is likely to be the first of the big central banks to increase interest rates. However, we think that there could now be enough evidence to suggest that the timing of that first rate rise might get pushed back a little given that the housing market is cooling off, inflation is sitting below target and real wage growth remains weak. 

Overall, we believe that there are plenty of encouraging signs that growth is improving and this is likely to benefit companies around the world. Ultimately, this should result in higher profitability and increased investment, which can help underpin the current positive momentum.

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