Such is the focus of mainstream media of late, you will be forgiven for thinking that the economy or markets do not have a future beyond the 23rd June. This, of course, isn’t the case. As the UK has voted to leave the EU, we will hear of nothing else for the foreseeable future.
However, before too long the market will divert its focus to number of pressing matters that have been quietly stewing in the background in the last 3 months.
US Rates
Real concern will emanate from the US and whether the Federal reserve are going to hike rates at a time when the market is not completely prepared for a tightening, causing another stock market rout.
One would hope they have learnt their lesson from Decembers hike but you would be foolish to put it past Yellen and her fellow central bankers.
An event that would justify the continued hold of rates is the upcoming US general election in November which promises as much debate, mudslinging and name calling as the EU referendum campaigns.
Raising rates before November will put investors on the edge of their seats and could cause sharp shocks in the market. However, as the Federal Reserve have said on numerous occasions, data supports such a move, you should be prepared for further tightening of monetary policy in the US.
European Economy
It is likely the market’s attention will turn quickly back to the Eurozone which, in the midst of unprecedented stimulus from the ECB, is still teasing investors who are betting on a continued economic recovery in the bloc.
Unemployment in the region has fallen over the past year to 10.2% as manufacturing activity remains in expansion territory and wages grow at a steady pace. You could argue that much of this improvement is the consequence of the ECB’s package and if it were to be removed, it could lead to a quick unwinding of asset price appreciation due to the lack of policy action from European governments.
The improvement in the European economy may well be a superficial product of the printing presses but the sheer quantity of assets and extended period of the program will undoubtedly provide the resources necessary to keep the Eurozone economy relatively buoyant for the coming 12 months at least.
Beyond this point, the governments of the Eurozone will be under pressure to enact reforms and take the reins from Mario Draghi and take the lead driving economic growth.
Chinese Growth
China is developing into something of an enigma for investors who are battling to draw any conclusions from the mixed economic indicators coming from the world’s second largest economy. On one hand, the rate of growth is slowing and on the other hand, the economy is in a phase of recalibration. This difference in interpretation will be the subject of much analysis throughout the second half of the year.
For years the world relied on China’s demand for natural resources to prop up global activity and as this demand slows and China becomes a more consumer orientated economy, the markets is fretting over which narrative they should believe; the ‘hard landing’ doomsday scenario or the maturity of China into a ‘developed economy’.
Common thinking on China will be driven a number of indicators with special emphasis being put on manufacturing data, commodity demand and house prices. Any persistent deterioration in these readings will likely lead to market volatility experienced last year.