The Weekly - No rabbits and no hat!

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27/11/2017
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The build up to the budget was intense, as is everything surrounding political leaders these days.  One of the benefits of instantaneous social media delivered 24/7 is that those who have the privilege to lead are now more accountable than ever before.  Democracy has attained the sharpest of focus.  No wonder the faux-democracies and communist regimes around the world control internet access so closely whilst seeking to exploit the openness of others.  Clearly we are discovering in the west that this also introduces instability as the media spotlight dissects every soundbite and message and connects it to their own agenda of support or opposition, conspiracy theory or cyber-attack.

We would generally say that as there have been no U-turns and no corrective restatements, Philip Hammond did a reasonable job. The markets didn’t move, Sterling didn’t weaken, whilst the housebuilders had an initial panic on the ‘land-banking’ enquiry which was largely recouped the following day as cooler heads reminded us that we have been here before. The last statement we wanted to hear was ‘we are making the following changes to pensions …..’. In fact, the subject wasn’t even mentioned. You could argue this is because it will be centre-stage next time but we’ll worry about that in a year’s time. In addition, he didn’t mention savers either and there was no change to the ISA allowance but then again, there was a significant increase to £20,000 in April.

The stamp duty changes for first time buyers was something of nothing when the numbers are calculated. If, and it’s a big if, a first time buyer should be able to afford a property over the existing zero stamp duty threshold of £125,000, then there is a saving of £1,500 on a £200,000 purchase price, or £5,000 when spending £300,000. Every little helps but not something that will transform first time buyer demand. More likely, an attempt to appeal to young voters if by chance they are planning to access the bank of mum and dad. Similarly, the doubling of the Enterprise Investment Scheme (EIS) allowance to £2m will apply to very few investors who will need an income tax liability of £600,000 to fully qualify. Headline grabbing but in practice, of limited application. So no rabbits and no hat really but then again, he had little room for manoeuvre. We move on.

Next up on the political front is Brexit which is coming to a head over the Irish border. The EU says this has to be sorted before we can move to trade discussions, but clearly, whatever terms of trade are agreed will determine how hard that Irish border needs to be. The same goes with membership of the Single Market and the Customs Union. We can’t leave the EU and maintain membership and still some maintain a view that membership should be retained whilst leaving the EU. Bizarre logic. At least there would appear to now be some urgency and ultimatum being applied by the EU which suggest that we will soon know whether an agreement or a hard Brexit lies ahead.

Michel Barnier gave Britain a two week deadline to make sufficient progress on 10th November which expired last Friday. We are not sure what the implication of breaching this was ever going to be and so it came and went and David Davis didn’t blink. Perhaps agreement on the bill and EU citizens’ rights will be announced shortly with Ireland and trade all wrapped up separately. For now, a royal wedding is much more newsworthy and breaks the monotony of it all.

Meanwhile, over in the US, Trump’s tax plan is crawling through Congress at a snail’s pace. It looks like the corporation tax rate will be cut significantly which is the main support for earnings upgrades that have driven the US equity market. That suggests that there is limited market downside for this reason alone. Similarly, leading indicators are suggesting continued economic strength with no clouds on the horizon. Somewhat priced for perfection but the engine of US capitalism continues unabated and it’s a brave investor who calls time on it just now. A December rate hike looks a near certainty so long as Thanksgiving and Black Friday shopping were robust.

We should also remember that this time of year is statistically seasonally strong with a year-end rally often experienced. At the very least this encourages sellers to remain invested until mid-Jan when the fourth quarter GDP numbers come out. In local currency terms, the MSCI World Index, which measures international equity markets, has risen by 16% year to date for 2017. This index has been running since 1970 and has an average annualised return of 9.5%. Each of the five years preceding the technology bubble returned more than 16% as did three of the four years that preceded October 1987. The last three years have returned less than 10% with 2015 a measly 2%. So, globally, there are of course hotspots but with Central Bankers so paranoid about raising rates too quickly, an environment of political scrutiny and induced instability like never before, will probably reinforce this trepidation and support equity markets.

Being overweight wherever Quantitative Easing persists is likely to prove profitable. Being underweight wherever interest rates are rising also seems sensible as the party is having to be calmed down and the fun is likely to subside. Overall, we continue to favour equities as the asset class of choice set to deliver the best real returns for now. Seasonally and statistically we are staying overweight to equities for now.

Crude Rises on Expected OPEC Supply Cut Extension Hopes

Last week saw further strength in Brent and WTI Crude which both continued to edge higher ahead of this week’s OPEC meeting in Vienna. The Cartel and Russia are widely expected to extend the production limits that have been in place this year, potentially by as much as another 9 months.

Back in January, total output was cut by 1.8m barrels per day and this has helped to lift global oil prices which have risen sharply over the last few months. At the close of play on Friday, WTI was at its highest since the summer 2 years ago (+3.6% to $58.61 a barrel) with Brent recording a weekly gain of +1.7% to $63.55. Elsewhere in the Commodity sector, Gold had a largely uneventful week despite further weakness in the Dollar (which lost ground against each of the major currencies) with the precious metal broadly flat at $1,289 an ounce.

It was another eventful week for US equities which took advantage of the holiday shortened week to close at yet another record high. The S&P500 delivered a +0.9% weekly gain, buoyed by those companies in the technology sector as it achieved its best weekly performance for 8 weeks. And it wasn’t just the US that benefited from rising stock markets. Domestically, the FTSE100 also ended the week in positive territory with a weekly rise of +0.4%, although that was exceeded by the mid-cap focussed FTSE250 which rose by +0.7%. In Europe, the German DAX30 and French CAC40 increased by +0.5% and +1.3% respectively whilst in Japan, the Nikkei 225 added +0.7%.

Gilt yields trended lower for a second consecutive week, this time by a further 5 basis points (bps) to 1.292%. The US treasury equivalent followed a similar path, declining by 3bps to 2.341% as prices crept higher in both sovereign markets.

As mentioned previously, the Dollar remained under pressure as it lost further ground against its peer group. Sterling was +1.3% higher against its American counterpart whilst the Euro jumped by +1.2% after some encouraging data regarding the strength of the German economy which helped allay some of the concerns surrounding the government turmoil in Berlin.

The Week Ahead

It’s a busy day at the Bank of England tomorrow as it releases the results from its latest banking sector stress tests. The tests are based on a number of hypothetical scenarios (including an economic downturn and collapse in the currency) with the findings being presented by Governor Mark Carney later in the morning. In terms of domestic data, Friday’s manufacturing PMI figure is the standout from the week. In the US, the second revision of Q3 GDP is released on Wednesday afternoon and a 30 basis points (bps) upwards revision on the initial 3.0% calculated is expected. The Institute for Supply Management releases its own PMI equivalents later in the week. And PMI’s are also the most significant data release in Asia this week with China releasing its output data for November in the early hours of Thursday. European focus will be on CPI inflation with the headline level forecast to have risen by another 20bps to 1.6%, taking it ever closer to the 2.0% targeted by the Bank of England.