As we approach the end of July, we highlighted in our week ahead it is one of the busiest weeks of the year for a combination of earnings reports and economic data. At least the week got off to a solid start after further encouraging news from the Chinese economy. Much ink has been used on the potential impact that sterling's strength will have on the upcoming UK earnings season. To our mind, what is far more important than the short-term currency hit is the underlying fundamentals of the business. If the fundamentals of a business are strong, currency factors even themselves out over time. A lot is also made of the focus that UK companies have towards Emerging Markets, and that too has hindered profitability. It is worth pointing out the MSCI emerging market index has been one of the best performers year-to-date and is still anticipated to outpace global economy growth expectations. Citi's economic surprise indicator for the EM region continues to show positive surprises.
On Monday the IMF released its annual report on the UK economy, praising the British economic recovery, which it says is becoming more balanced. The main points of focus for the financial press is that the IMF agrees interest rates should be staying low for now, but it remains wary of a housing bubble and suggest at some stage the BofE may have to use interest rates as a tool to curb rising house prices. The United Kingdom has a limited space to build on, and as the population grows, supply and demand is always going to be an issue. The IMF focussed on this point, suggesting Britain’s housing market was hampered by a lack of supply, compounded with complicated planning laws. The IMF report reiterated its previous concerns regarding the productivity gap; if it does not start to close, it could eventually stall growth.
On Wednesday the Federal Open Market Committee will deliver its latest rate decision. Expectations quite rightly are for a continuation of the same policy that they have followed since tapering began; no change to interest rates and a further reduction of $10bn of the asset purchase program. If there is any form of communication post the decision, expectations are low for any further clarity when the market can expect the first rate rise, the guessing game will continue.