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Equities rocky with dollar strength in sharp focus

Publication Date: 14 Aug 2018 - By ReachX Team By ReachX Team
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FX & Rates Equity Fundamental Macro Fixed Income/Credit Equity FX EU ex-UK UK

With the Turkish crisis showing no signs of easing, and the US dollar’s strength dominating the foreign exchange market chatter, a leading City analyst says equities remain on a weak footing.

In a note to clients on Tuesday (14 August), Abi Oladimeji, Chief Investment Officer at Thomas Miller Investment, said: "We continue to believe the balance of macro risks and opportunities warrants a neutral stance on the major asset classes relative to longer term strategic allocation and, therefore, we are maintaining broadly neutral asset allocation positions."

Focusing on equities, Oladimeji believes the markets are caught between the positive effects of robust growth and strong earnings and the negative influence of uncertainties about interest rate outlook and trade policy. 

"Despite providing short term support, the strength in recent earnings growth is not sustainable and the likely decline in earnings growth rates should begin to weigh on expectations for 2019."

Switching tack to the FX market, Oladimeji believes the key trend looks set to remain that of US dollar's strength against other major currencies as the greenback continues to enjoy yield support. Strong growth, low unemployment rate and rising inflation mean that the US Federal Reserve is likely to maintain its course of interest rate hikes. 

Focusing on sterling, the Thomas Miller Investment expert said the recent slide in the GBP/USD rate has been driven by ongoing Brexit-related uncertainties as investors assess the risk of a no-deal exit from the EU.

"In the short term, the weight of bearish investor positioning could push GBP much lower than what could be justified on fundamental grounds. Nevertheless, an actual no-deal outcome would most likely result in a far more protracted sterling sell-off, likely pushing sterling below $1.20. 

"On the other hand, sterling’s sensitivity to Brexit news flow is such that any news of a UK/EU agreement could trigger a sharp relief rally which would be further fuelled by short covering as bearish positions are unwound. It looks set to be a long summer for sterling."

 

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