World equity index hits a record high as the Trump Trade dies and the search for yield intensifies

Currency moves dominate, with the UK consumer under growing pressure

Another month of political farce in the US and UK, antagonistic posturing from North Korea, and mixed economic data did little to deter demand for equities, with the world equity index making a record high. Fixed interest bonds were also mildly positive after dovish comments from central bankers.

Currency moves had a major impact on returns over the month. In local terms, US shares hit new highs, rising 2 to 3%, while European shares fell by 0.5 to 1.5%. When translated into sterling, however, European shares showed gains of around 1.5% while US shares barely rose. UK stock markets ended the month 1% higher, with small and medium-sized companies outperforming larger ones. Emerging markets improved by over 4%.

Inflation across the main economies undershot forecasts, retreating from the recent highs that had provoked calls for monetary tightening. In the UK, prices fell month on month for the first time since April 2016, though this was seen as a temporary blip.

Further evidence emerged of the squeeze on UK consumers. The IHS Household Finance Index indicated the lowest appetite for major purchases since 2013, and a survey of the UK's biggest banks and building societies reported credit card default rates rising at the fastest rate since 2009.

The Trump Trade is dead, but new highs keep coming

The "Trump Trade" died a death several months ago when it became clear that he would struggle to implement many (any?) of his election promises. The interesting bit, though, is that despite this, and the Federal Reserve raising interest rates, US shares have repeatedly hit new highs. Indices even closed at a fresh high after the Federal Reserve signalled that they were close to reducing their bond portfolio (acquired via quantitative easing). By contrast, the US dollar bore the brunt, falling to its lowest in 31 months.

Both moves can, in part, be explained by the slightly more dovish rhetoric from the US Federal Reserve. Yes, they are still raising rates, but the feeling is that there will be fewer rises, with the peak considerably lower than previously feared. Following Fed Chair Yellen's more cautious testimony earlier in the month, the market priced the likelihood of a third rise this year at less than 50%.

Investors' need for income continues to be reflected through the bond markets. First, despite the heaviest hints yet that the US Federal Reserve could start to reduce its balance sheet in September, 10-year US treasuries yield just 2.25%. In the aftermath of the ill-fated Taper Tantrum of 2013, yields hit 3%. Second, hot on the heels of the oversubscribed new bond issue by serial defaulter Argentina, investors clamoured for the first issue in three years by Greece. Historically, this type of folly has signalled the top of the market, but with little chance of higher cash rates in Europe or the UK this year, the search for higher yields will probably continue.