“Brexit threw a spanner in the works” according the IMF

As the citizens of Great Britain sizzled the equity markets were lukewarm on Tuesday, the FTSE 100 hardly mustering any movement at all, despite quite a lot of macro news. The latest UK inflation data released on Tuesday reported a year on year pickup in inflation for June by 0.5%. The retail price index rose by 1.6%, again slightly higher than expected. This higher than anticipated rise in inflation led to a small jump in the value of sterling, as it may have further reduced the risk of the Bank of England raising interest rates next month. However, this news appeared to have little impact on the UK gilt market as yields barely moved on the day. Later today we will see the latest employment rate and average earnings.

The International Monetary Fund released their latest estimates for economic growth “adjusted” for Brexit. They now forecast the UK economy will grow at 1.3% next year as opposed to previously forecast 2.1%. How they can possibly make such sweeping changes in such a few weeks is hard to fathom, will they be right? Time will tell but history tells you economists rarely correctly predict economic growth a quarter ahead let alone a year. The IMF added that they saw some positive signs for the global economy in the first half of the year but Brexit has “put a spanner in the works”. At times it feels that half the problem for the global economy presently is bodies like the IMF going round telling everyone it will be worse than expected, leading to a risk they can end up fulfilling their own prophecy. Brexit has not yet happened, could well not happen, and even if it does it is already beginning to feel that the consequences are being exaggerated.

It is true the bond market and equity markets are telling you different things, yields at all-time lows and equities in the US at all-time highs. As both have risen together maybe one day both will fall together. In the meantime, according to the latest Merrill Lynch fund manager survey, fund managers are even more prepared for day the market corrects itself. Cash held by fund managers has risen for another month, and is now at its highest level since 2001. Fund managers remain convinced growth remains low; inflation expectations are at a four-month low. For the first time in four years’ fund managers are marginally underweight equities in their portfolios.

Merrill Lynch believes this negative fund manager sentiment bodes well for equity prices in the coming weeks. What it does also mean that should an external shock come, for example the Federal Reserve unexpectedly raising interest rates next week, and should equity markets fall recovery could be just as swift as fund managers may look to use any weakness as chance to re-balance the books.