Monthly commentary - May 2016

Brent Crude rallied more than 8%, ending the month just shy of $50. It broke through that psychological barrier for a few hours earlier in the month as well. This rise in oil prices, driven by supply concerns in Nigeria and Canada, helped boost most equity markets. The cost of a barrel has almost doubled since January’s lows.

At the month’s outset, it seemed highly unlikely the US Fed would raise its rates this year; however, a series of strong data has reversed that. By month-end, it was a coin-toss whether the Fed will add 25 basis points to its base rate in the next few months. Inflation continues to creep toward the Fed’s 2% target, while measures of consumer and business confidence and spending improve as well.

The consequences of tighter Fed policy will affect the globe, however. When investors begin to expect another rate hike, it pushes up the already highly valued dollar. This causes a monetary tightening of its own and creates a headwind for US exporters. The Fed is moving cautiously because it doesn’t want to strangle the US recovery. And, as much as it doesn’t want to advertise it, the Fed has to make sure the rest of the world isn’t upended by its actions either. Because when the dollar rises, the price of commodities sold by much of the emerging world falls.


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Source: FE Analytics, data local currency total return to 31 May 2016

If rates do rise in the next few months, we think this is a good thing for the global economy. It would mean the world’s largest market is continuing to grow steadily. That is good for companies: their revenues should grow, leading to greater profits and more money to invest or return to shareholders. 

Ever closer polls

Brexit has dominated the airwaves ahead of the 23 June vote. Both sides have ratcheted up the rhetoric, promising plagues and woe for either result. We think the pros and cons are relatively even, although there will be plenty of volatility following a ‘Leave’ vote. There is also the chance of a long-term dip in trade if our politicians fail to secure trade bilateral deals outside of the European bloc. Although that will take years to finalise – and elongated periods of uncertainty are not preferable for most investors.

All of the doom-mongering has started to raise the ire of the public. The credibility of many politicians is being eroded by overstated risks and dubious logic. Either way, the result is likely to have a substantial impact on political careers from both sides of the debate.

As the vote gets closer, so have the polls. Markets appear to be swinging on every poll and data point now. This short-term volatility should provide opportunities for astute investors.

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