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14th July 2017

BREXIT BACKLASH

This week we started to see the reality of Brexit as some of the mechanics of the transition become visible. A decision to quit Euratom, the European nuclear watchdog, shows just how deeply reliant the UK is on European institutions. This hidden infrastructure that the country has relied upon for 60 years is only now entering the public consciousness, as people realise there is more to Brexit than immigrants and bendy bananas. While it’s likely that article 50 is irreversible; to achieve the hard Brexit that seemed inevitable only a few months ago, a lot of things need to happen. A weak and unpopular prime minister needs to keep together a fragile government, public support needs to be maintained in the face of worsening economic conditions and mounting costs, and serious technical challenges of regulation and infrastructure, many of which are not yet fully understood, need to be solved. All the while Theresa May has to deal with pressure groups, her reality-challenged backbenchers and the prospect of being knifed by Boris Johnson at any moment. Even the most optimistic Brexiteer would be a fool to offer you more than even money on a clean break.

US: TRUMP JR. IN HOT WATER

This week Trump Jr. tweeted images of an email exchange he had with Rob Goldstone in June 2016. The emails show Goldstone offering potentially damaging information on Presidential candidate Hilary Clinton, from a Russian source. Following the email exchange, a meeting was arranged between a Russian lawyer, Trump Jr, Trump’s son in-law and Trump’s former campaign manager, however, no information was provided. Trump Jr. maintains that Trump didn’t know about the meeting however, Trump promised big news about Clinton’s crimes in a speech just a few days after the first emails. The White House is concerned that this latest story will make it more difficult to push forward with the President’s policies regarding health care, tax reform and infrastructure. If the Senate’s bill passes to repeal Obamacare it is estimated up to 22m Americans could lose their insurance. The Senate’s version will see most of Obamacare destroyed by scrapping the mandate that every American must have health insurance. This will push up premiums as the young and healthy opt out leaving the older and sicker Americans.

MONETARY POLICY

BONDS BOUNCE BACK Global government bonds stabilised this week following the two-week sell-off. Hawkish comments from major central banks had unnerved bond investors and sent yields soaring. Yields fell at the start of the week as bond investors relaxed slightly. The ten-year UK gilt yield dropped to 1.26 per cent and the 10-year German bund yield dropped to 0.54 per cent. However, throughout the week these have climbed slightly. The yield on the broad Bloomberg Barclays developed-market sovereign bond index hit 1.02 per cent last Friday from 0.87 per cent at the start of June. The Federal Reserve Chair, Janet Yellen commented this week that the central bank will need to keep gradually raising interest rates, but not to levels seen in previous cycles. Central banks continue to use words like gradual and slow in a bid to avoid a repeat of the 2013 taper tantrum. These comments helped bonds recover and the 10-year US Treasury note yield dropped to 2.31 per cent from 2.34 per cent. Yellen’s comments proved particularly helpful for emerging market currencies with the South African rand, Turkish lira and Russian rouble leading the rally.


Data sourced from FE Analytics. All content is intended as general information only and does not constitute investment advice, a recommendation or investment research as defined in the FCA Handbook. This information is not guaranteed to be correct, complete or accurate. FE research is a division of Financial Express Ltd, an appointed representative of Trustnet Ltd (FRN 209967) which is authorised by the Financial Conduct Authority.



7th July 2017

TENSION SURROUNDS G20 SUMMIT

This week all the focus has been on the G20 summit that is taking place in Germany. Most of the press coverage has been on what Trump might do; the president is firmly in the bad books of China and Germany, who look set to become the international community’s new foster parents. Additionally, the global get together will give him his first chance as president to meet Vladimir Putin, which will be nice. While the press is keen on seeing a train wreck unfold, there are the serious issues of diffusing a possible trade war and dealing with North Korea that the meeting offers a chance to respond to. Elsewhere rate speculation is really heating up, with bond markets down about one per cent over the week. Mario Draghi kicked things off with claims that the ECB has beaten deflation, the MPC minutes showed rate hawks in the ascendency at the Bank of England and the US Federal Reserve began discussing how it’s going to start unwinding its massive balance sheet after years of QE. While the end of low rates and easy money has been unsuccessfully called many times before, just maybe this time is different. We wait to be convinced.

US: NORTH KOREA MAKES ITS MOVE

This week North Korea threatened the US with an unwanted fourth of July present in the form of their first missile capable of reaching the US. A top American military commander in South Korea said on Wednesday that the U.S. and Seoul are prepared to go to war with North Korea, if given the order. There was a shift to haven assets such as gold and the Japanese Yen however, this faded once investor attention shifted back to central banks and the future of monetary policy. Elsewhere in the US, Tesla is on track for the worst week since February 2016 as shares suffered declines for the third consecutive day. Shares closed down 5.9 per cent at $309 on Thursday taking the drop to 14 per cent this week. One reason behind the drop was an announcement from Volvo, which said on Wednesday that it would stop manufacturing combustion engine only vehicles by 2019. The car manufacturer also stated that it would launch five fully electric cars between 2019 and 2021, increasing competition for the once-maverick Tesla.

UK: PMI SHRINKS AS CONFIDENCE WANES

The UK construction Purchasing Managers Index (PMI) slowed to 54.8 in June from a 17-month high of 56 the previous month as political uncertainty continues (any reading above 50 indicates a sector is expanding). The manufacturing PMI also slowed to 54.3 from 56.3 however, the average of the past three surveys points to the fastest rate of quarterly manufacturing growth in three years. The dominant services sector also suffered a slowdown as PMI fell to 53.4 from 53.8. The three lower than anticipated PMI scores caused sterling to drop 0.4 per cent versus the dollar. The composite measure which brings together all three PMIs, fell to 53.8 in June from 54.5 the previous month. The average for the composite PMI for the second quarter was 55.9 and as a PMI of 51 is estimated to be equivalent to stagnation, this average should bring a higher rate of growth. Economists expect between 0.4-0.5 per cent to be consistent with this figure however, this link significantly overestimated the pace of expansion in the first quarter, pointing to 0.4 per cent while official estimates suggest GDP rose by just 0.2 per cent.

EU: THE EU AND JAPAN STRIKE A DEAL

The EU and Japan have endorsed a preliminary free-trade agreement pushing back against Donald Trump’s protectionist stance. The accord was agreed by EU President Donald Tusk, EU Commission chief Jean-Claude Juncker (who had a bit of an outburst in Parliament this week) and Japanese Prime Minister Shinzo Abe. The deal, four years in the making, had reached a standstill over food and car exports (particularly Japanese soft cheese) however, the leaders appear to have resolved their differences just in time for the G20 meeting in Hamburg this weekend. Meanwhile in Italy, the European Commission had given its approval for a five-year restructuring plan for the Italian Banca Monte dei Paschi. The bank must close 600 branches and make 5,500 job cuts to comply. The bank has struggled since the European sovereign debt crisis in 2009 dropping from €2450 a share in June 2009 to €15 most recently. Shares have been suspended since December 2016 due to liquidity concern. The overall cost to the taxpayer is estimated to be about one to two per cent of GDP which will push Italian debt up from 132.5 per cent of GDP.


Data sourced from FE Analytics. All content is intended as general information only and does not constitute investment advice, a recommendation or investment research as defined in the FCA Handbook. This information is not guaranteed to be correct, complete or accurate. FE research is a division of Financial Express Ltd, an appointed representative of Trustnet Ltd (FRN 209967) which is authorised by the Financial Conduct Authority.



30th June 2017

GOVERNMENT FOCUS FALLS INTO PLACE

This week the fallout from the general election has come to some sort of a conclusion with the passing of the Queen’s speech on Thursday. A consequence of the government’s new position is that much of the planned legislation has had to be abandoned and the focus will mostly be Brexit. This is actually a good thing. The amount of legislation and complexity involved in leaving the EU has continuously been underestimated, at least in public; an acknowledgement that it will be the sole focus of this government (and probably at least the next couple) is a welcome, albeit accidental bit of honesty. Elsewhere an old favourite, interest rate speculation, has come back with gusto. Following the revelation of a split in opinion on the Bank of England’s Monetary Policy Committee, there has been a noticeable uptick in fortune telling. The Governor’s comments on household indebtedness this week can’t be called in either direction – but further underscores the problems facing the bank. A sustained period of low interest rates is having undesirable consequences, but the economy hasn’t recovered enough to warrant rate rises.

EU: ECB PLAYS HARD TO GUESS  

Markets reacted hastily following European Central Bank (ECB) President, Mario Draghi’s speech on Tuesday. Analysts focused on Draghi’s comment that “deflationary forces have been replaced by reflationary ones” and decided that this signalled the bank was preparing to taper the ECB bond-buying scheme. The 10-year German bond yield posted the biggest one-day rise since December 2015 and the euro reached the highest level against the dollar in a year. The surge was short lived as ECB Vice President, Vítor Constâncio insisted the remarks were simply referencing strength in the Eurozone rather than any plan to end the ECB’s bond-buying purchase scheme earlier than planned. The euro dropped nearly one cent against the dollar and government bond yields pulled back. It’s not just the ECB sending mixed signals, UK Bank of England governor Mark Carney made a U-turn this week as he commented that he is prepared to raise interest rates if UK business activity increased. This followed his comments last week that “now is not yet the time” for an increase. The pound climbed 1.2 per cent to $1.30 after the comment.

US: BANKS GET A BOOST

The US Federal Reserve announced a vote of confidence for big banks on Wednesday as 34 of the largest US banks passed the annual capital assessment exercise. As a result, the Fed approved an increase to dividend payouts and share buybacks. The approved banks can now distribute more than 100 per cent of earnings in these forms - the highest levels in years. After the last financial crisis, the Fed had advised banks that if they wanted to pay dividends worth more than 30 per cent of earnings they should expect strict scrutiny. Shares of financial companies led US stocks higher on Wednesday. The Dow Jones Industrial Average rose shortly after opening and the S&P 500 posted its biggest one-day gain in two months. Financials are up more than five per cent this year thanks to the Fed’s interest rate hikes and this latest announcement. Several banks experienced at least a two per cent surge. HSBC gained 3.7 per cent and Citigroup, Bank of America and JPM were all up around three per cent.


Data sourced from FE Analytics. All content is intended as general information only and does not constitute investment advice, a recommendation or investment research as defined in the FCA Handbook. This information is not guaranteed to be correct, complete or accurate. FE research is a division of Financial Express Ltd, an appointed representative of Trustnet Ltd (FRN 209967) which is authorised by the Financial Conduct Authority.

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