Inflation has been rising globally
Inflation has been rising globally, and the Euro area has now breached the 2% target of the European Central Bank (ECB). The increase has been driven in the short term by increasing energy prices, although, a strengthening economy has also had an impact. However, there is a significant disparity in country level inflation rates. In Germany, where the economy remains strong and the jobs market tight, inflation is running at 2.2%. Rising inflation and stronger growth have increased pressure on the ECB to taper its current quantitative easing programme and/or move towards a small increase in interest rates. While inflation has been driven by one-off energy price rises, it has moved the Eurozone away from the dangers of deflation and has perhaps given central bankers enough breathing room to tighten monetary policy, albeit only slightly.
The success of the initial public offering of Snap (owner of Snapchat) last week and the announcement of a potential merger by Standard Life and Aberdeen Asset Management over the weekend is another indicator of the positive equity market sentiment. Snap’s share price rose by 44% on its first day of trading, despite questions over corporate governance and profitability. The company made a loss of $500m last year, and the issued shares will have no voting rights, leaving the control of the company with the founders and core shareholders. A potential merger by two of the largest UK fund management groups Aberdeen and Standard life is a result of the globalising nature of fund management. The combined group will have assets under management of approximately £660bn making it one of the largest fund managers in the world. However, there are concerns over potential job losses and cost cutting if the merger goes forward.
While much attention last week was focussed on Donald Trump’s speech to Congress on Wednesday, comments from the Federal Reserve over the increasing likelihood of another interest rate rise in March finally impacted markets. There is now a nearly 90% probability of a quarter percent rate increase priced in for this month. While this is only one move in a steady tightening programme, it will nevertheless test how the US economy and financial markets can cope with a more normal level of interest rates.
|UK 10 Year Gilt Yield||1.154||1.18||0.026||2.25%|
Chinese inflation is announced on Thursday. UK trade and manufacturing data and US non-farm payrolls will be released on Friday.