In a week marred by violence on both sides of the Atlantic, positive indicators in leading economies could not prevent markets delivering a mixed performance. 
Events in the US last week have certainly led investors to feel more cautious about the future. Donald Trump blamed both sides after a white nationalist demonstration in Charlottesville turned violent.
In doing so, he has alienated both leading Republicans and several senior business figures. A number of the latter quickly announced their departure from two White House business panels; the Manufacturing Council and the Strategy & Policy Forum. The departures led the president to disband the committees altogether.
The decision presumably means that big businesses will not enjoy the president’s ear as much as it had. Yet even with the councils in place, he still had a long way to go before ratifying corporate tax cuts or deregulating the financial sector as pledged.
Therefore, it came as no surprise when US stocks dipped in the second half of the week. The departure of Steve Bannon, Donald Trump’s chief strategist, from the White House helped shave one-week losses on the S&P 500 to just 0.27 per cent.
Yet even discounting Bannon’s departure, it might seem surprising that stocks didn’t dip further. The S&P 500 undergoes a daily 5 per cent dip several times over the course of a typical trading year and yet this year you can count even its 1+ per cent single-day declines on the fingers of one hand.
Neither an escalation in nuclear rhetoric between Washington and Pyongyang, nor the president’s equivocation over neo-Nazi demonstrations in the US, has meaningfully moved the dial. Volatility on the US’s main index did spike late in the week, but still remained comfortably below its long-term average.
The conduit for investor caution this year has probably been the dollar above all; the greenback has slid almost 9 per cent against a basket of six leading currencies in 2017. This may have acted as a boon to many US companies, particularly those reliant on exports. US consumer sentiment last week struck its highest level since January.
Easing easingThe Federal Reserve certainly appears to view the broader US economy in a favourable light, if the latest committee minutes are anything to go by. Central bank officials now believe that the Fed can begin to reduce its highly-extended balance sheet “relatively soon”, although members remain concerned at persistently low inflation. The other leading indicator the Fed is mandated to respond to, unemployment, has pointed to a rate rise for some time.
Six major central banks worldwide pursued quantitative easing in earnest after the crisis, and today it is the European Central Bank (ECB) that holds the most assets, followed by the Bank of Japan (BoJ). Between the six of them, the banks hold more than $15trn in assets, with almost two thirds of it in government bonds.
In fact, both the ECB and BoJ were last week supplied with further reasons to taper their holdings, should they so desire. Japan clocked its sixth consecutive quarter of growth, the country’s longest unbroken stretch in more than a decade. Its economy grew 1 per cent in the second quarter, a remarkable outperformance of expectations. The latest indicators suggest the third quarter is on track too, with private consumption levels a particular highlight. The buoyant figures may yet give the prime minister some of the momentum he needs to push on with his reform agenda. The Nikkei 225 fell 1.3 per cent last week, suffering in part from a strong yen and weak dollar.
Across the eurozone, impressive growth numbers for the second quarter offered cause for confidence.
German GDP actually slowed marginally in the second quarter, but still came in at 0.6 per cent, meaning it achieved its best annualised rate since 2014. France grew by 0.5 per cent, while Spain surged by 0.9 per cent, and the Netherlands rocketed 1.5 per cent; a stellar rate for a developed market.
Reassuringly, the countries most afflicted by the global financial crisis are showing healthy recovery signs as well. Ireland is currently growing 6.6 per cent year-on-year, while its sovereign debt yield is close to that of France. The second quarter of 2017 was the 17th consecutive quarter of eurozone growth.
Waiting game
Inflation in the UK defied expectations by remaining unchanged at 2.6 per cent in July, held down in part by falling fuel prices. In its latest report, the Bank of England said that it expected inflation to climb to 3 per cent in October; another blow for cash savers. The FTSE 100 rose just 0.19 per cent.
The UK’s relationship with Europe continued to loom large over the course of the week. Paul Jenkins QC, former head of the government’s legal services, mocked the prime minister’s assertion that the UK could break free of European laws while still enjoying the benefits of the single market, saying it was “foolish” and that keeping close links to the customs union and single market will mean keeping to EU law “in all but name”.
Meanwhile, a report published by Economists for Free Trade, a group of pro-Brexit economists, argued that removing all tariff barriers would help to generate £135bn extra per year for the UK economy. On markets, the pound struck a ten-month low as an imminent rate rise looked increasingly unlikely, but UK wage growth showed up better than expected last week, rising 2.1 per cent in July, while unemployment fell to a new low of just 4.4 per cent (although productivity also fell slightly).
Chris Ralph is chief investment officer at St James’s Wealth Management. All views are his own and should not be taken as investment advice.