The renewed concerns about growth in China, which led to a rout in Chinese equities at the start of 2016, hit financial markets worldwide, including the UK. That said, the UK has been relatively sheltered from this storm, with bond yields only falling back to slightly below where they were a month ago and the FTSE generally outperforming equities in the rest of the world. What’s more, the UK has effectively experienced a monetary loosening which will be positive for the real economy, with markets pushing back the expected date of the first interest rate hike and sterling continuing its recent downward trend. However, we believe that interest rates will rise faster than markets are currently expecting. This, along with further monetary policy easing from the ECB, should result in a bounce-back in sterling against the euro, which will lead to a rise in the exchange rate on a trade-weighted basis.
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