Shorter Days, Limited Daylight

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06/11/2017
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The big news last week happened on Thursday when the Bank of England raised interest rates back up to 0.5%. This was widely expected and, in fact, in the immediate aftermath of the vote, Sterling fell against other major currencies. This is unusual, because in most cases a rise in interest rates increases Sterling’s appeal, thus resulting in a strengthening of the currency. However, with the Bank of England having talked up this change in interest rates, this was already factored into the markets. The statement that followed settled the markets saying that there are only likely to be another two increases spread over three years. This is hardly a hawkish tone, especially as these will be very dependent on the performance of the UK economy. So we would say that any newsworthy action on interest rates is most likely off the agenda for the foreseeable future, assuming that inflation starts to revert back to the 2% target as the Sterling effect drops out of the numbers.

This move certainly isn’t a reason for savers to be jumping up and down with joy; we hardly expect this to be passed on to savings accounts across the UK. What the banks will do, and there is already evidence for this, is they will increase their margins by factoring this rate into those on variable rate mortgages. Credit cards and other unsecured debts will also adjust but the poor saver will be lucky if they see any benefit.

Other developments of interest which we observe are the true intentions of Trump’s visit to Asia. His ability to make a heavy-handed tweet or say some confrontational statement is legendary and so there is always a chance he will reignite anti-globalisation concerns or North Korea rhetoric. Meanwhile, the markets await the outcome of his tax plan which has now moved into the second year after the US election that put him in the White House. Will this market sensitive piece of legislation actually make it through Congress?

We are just two weeks from the UK Autumn Statement which is an important one. Speculation is at fever pitch as to what will be delivered. Most likely, there will be an apparent shift to the left in recognition of the realistic opposition that Labour now present an attempt to appeal to the broader populace. Whether this will be successful remains to be seen but the differences between the rich and poor are being increasingly exposed as shown by the most recent offshore revelations and tax avoidance schemes employed by royal advisers.

One final thing worth mentioning is the sexual assault allegations that seem to be surfacing. Whilst this might not be worth mentioning when it is limited to disgraced Hollywood bigwigs and actors, we certainly think that it is worth mentioning when it extends to our own MPs in Parliament. Last week, defence secretary Michal Fallon resigned his post on the front bench for inappropriate behaviour towards a journalist 15 years ago, whilst also warning that there could be further allegations to come to light!

This could well have a snowball effect and result in many more people coming forward. Whilst the voting public acknowledge and accept that MPs may not always behave in the way they would like to lead us to believe, we can be sure of one thing, there will be no quarter given to sexual assault. MPs are there to represent the voting public and any serious allegation of sexual assault should result, in the very least, the MP in question losing their job. With accusations levelled at both the major parties, this could potentially have more serious consequences for the future of Theresa May’s government, and could prove problematic for the Tory party and their slender majority. If there are a number of serious allegations that prove to be true and a few Tory MPs were indeed to lose their jobs, then this could result in several by-elections, thus running the risk that the government lose their ‘confidence and supply’ majority with the DUP. If this does happen then where does it leave the UK on Brexit? However, there is nothing to say that the Tories couldn’t increase their majority with Labour standing accused of promoting an MP to the front bench following allegations of sexual assault.

So, on balance, not a great week for the Sterling outlook – the Brexit negotiators need to announce something positive on Brexit soon and certainly before Christmas which will instil some confidence in the process. Industry bodies are starting to pile on the pressure that they will begin planning for a ‘no deal’ outcome if there is no agreement by the year-end. UK equities remain one of the most under-owned asset classes for the International investor and have underperformed overseas developed markets over the last six months. Therein lies the opportunity some would say but this takes a lot on trusting that some clarity appears soon.

As the days get shorter at this time of year, we are all spending too much time in the dark on Brexit. We desperate need some daylight to lift the gloom.

Markets relaxed over BoE rate rise

Equity markets were little moved last week by the Bank of England’s decision to raise interest rates for the first time since July 2007. The FTSE 100 succumbed to a weekly loss of -0.2%, whilst most overseas equity markets made only modest gains.

The Monetary Policy Committee confirmed a rise in rates of 25 basis points to 0.5%, effectively unwinding the central bank’s rate cut last year during the aftermath of the Brexit vote. Carney also indicated that further increases will only come at a gradual pace and to a limited extent. The rise, whilst well sign-posted in recent months by Governor Mark Carney, is surprising given the headwinds that face the UK consumer in the form of negative real wage growth and a heavily clouded political outlook. Sterling fell after the announcement while yields on Gilts initially declined as the committee simultaneously warned that Brexit uncertainty will continue to weigh on domestic activity. The latest Purchasing Managers Index (PMI) data give some respite to immediate concerns over domestic activity levels, as October showed improved levels across Services, Manufacturing and Construction sectors following poor readings in September.

The US economy also saw solid numbers in their equivalent PMI measures, produced by the Institute for Supply Management. Services surged to its highest level in three years and whilst Manufacturing dropped slightly, this remains at high levels. The US Labour Report was also published Friday, revealing another drop in the headline unemployment rate to 4.1%, now a 16-year low. Non-farm Payrolls data suggested the US economy created 261,000 new jobs in October as the labour market rebounded from hurricane disruptions which severely dented the previous months survey. The recovery though was somewhat smaller than many economists had forecast. The S&P 500 climbed +0.2% during the week.

The Federal Reserve hinted at its own rate rise before the year-end, having voted to leave policy unchanged at last week’s meeting. The Fed acknowledged the recent hurricane disruption but noted that these were unlikely to alter the plans.

In Europe, an initial economic growth estimate for the third quarter was ahead of most forecasts, recording a quarterly rate of +0.6%. The latest inflation reading however dropped to a headline rate of 1.4% and a core rate of 0.9%, which is well below target and may dent the European Central Bank’s intentions to reduce quantitative easing measures.

The Week Ahead

Domestically, the main items to keep an eye on this week include the latest retail sales data from the British Retail Consortium in addition to manufacturing production. It’s a relatively quiet week in the US with Friday’s consumer sentiment indicator from the University of Michigan being the standout. In the Eurozone, October’s PMI numbers are released alongside retail sales and industrial production growth in Italy and France. In Asia, Chinese trade data and inflation are likely to garner most the attention although the latest Bank of Japan policy meeting minutes will also come in for close scrutiny.