This week Trump and his administration have quit the Iran Nuclear Deal which he has described as having a “decaying and rotten structure” and has said that Iran will be subject to the highest level of sanctions. This has shaken the financial markets and especially oil. Trump re-imposing sanctions would reduce the global crude supply and could feed tensions in the Middle East. Its not too clear why this has come as a surprise as Trump had already told French President, Emmanuel Macron that he was going to pull out of the deal. This has impacted Oil prices, which are determined by demand and supply, and if supply gets threated, the price jumps up very quickly.
Tomorrow is the Bank of England’s Monetary Policy Committee (MPC) decision on monetary policy. As we have been in such a low interest rate environment, the Committee will plan to start hiking interest rates soon which will bring the Bank of England closer to resolving the issue over high inflation. It is arguable that the MPC shouldn’t increase rates from 0.5% since the UK economy is slowing down and by increasing rates, this will signal higher cost of borrowing which isn’t ideal when the markets are slowing down. It is anticipated that the Bank’s MPC will remain at 0.5%. Two of the main drivers for any increase have both fallen away, inflation has fallen faster and further than expected and the GDP growth numbers have also been disappointing. If the ongoing uncertainty around Brexit is added in then the Monetary Policy Committee is likely to stumble on the side of caution and keep the rate at the current level.
UK house prices growth slowed in three months to April, carried out by Halifax Bank. It found that prices were 2.2% higher than a year earlier down from the 2.7% annual; growth recorded in March. On a QoQ basis, prices were 0.1% lower than in the preceding three months, which was the third consecutive decline by this measure. This is an interesting measure as it shows how resilient the UK economy is. Despite Brexit pressures, it is apparent that the UK economy is slowing down and we would expect this to slowdown even further as the deadline for leaving the EU gets closer and closer to March 2019.
Chinese exports rebound in April, which has been optimistic on global growth as if the Chinese consumer starts slowing down, then this would indicate overall weakness. The trade growth last month jumped up quite impressively as exports rose nearly 12.9% from a year earlier, which beat analysts’ forecasts and rebounding from a 2.7% drop in March. Imports also grew stronger than expected. China’s trade surplus for April topped expectations at $28.8bn (£21.3bn), well above predictions of $24.7bn. The news comes amid fears of a US-China trade war, including demands from President Donald Trump to close the trade gap between their countries. In a bid to ease those tensions, Chinese President Xi Jinping is sending his top economic adviser to Washington next week. It follows a visit to China last week by a high-level US delegation including Treasury Secretary Steven Mnuchin. We are closely watching the end of the cycle and by doing so we look at the economics and the data of influencing countries such as China.
What would this month’s Purchaser Manager Index (PMI) numbers suggest?
At the beginning of every month, the IHS PMI numbers are published which indicate the direction the global economy is leading towards or has past. These numbers are useful for economists, as well as investors to gauge the overall health of the global economy. If the results are above 50, this indicates growth in that specific sector, or conversely, a contraction is the results are below 50.
Despite rising from 53.3 to 53.8 in April, the global composite PMI remained comfortably below its February peak of 54.8. This trend was mirrored in the manufacturing and service sector components which of both increased on the month but remained well below the levels recorded in February. The falls in the PMIs in March were largely attributed to the threat of trade protectionism. However, April’s outturn makes it harder to argue that that fall represents a temporary confidence-related blip. Protectionism concerns have rumbled on, it may be another month before the EU and other US trade partners know whether they will gain a more permanent exemption from the US steel and aluminium tariffs. While economist’s view is that the risks of a full-blown trade war are still small, ongoing tensions have the potential to raise firms’ costs and disrupt supply chains, particularly in the US. April’s PMI readings may be the firmest sign, yet that global GDP growth has peaked in the cycle.
For anyone who wants further data to substantiate the position please review the attached Global Economic News Document.
Model Portfolios & Indices
Over the last week we have seen most of the indices that we track increase, regaining grown from the volatility seen in the beginning of February. Markets haven’t yet pencilled in yesterdays events of Trumps administration cancelling the Iran nuclear deal. As oil prices have shot up, this will benefit oil producing countries, such as Latin America (LatAm) and impact oil dependant countries such as Asian countries. What happens this time depends on how many countries decide to fall in line with US sanctions and stop taking Iranian crude. India and China, the two top buyers, may decide to keep importing Iran’s oil. Nevertheless, global stockpiles of crude oil have been falling, and if Iran contributes less to global supply, prices are likely to head higher.
Most of the gains in the indices were lead by the US S&P 500, the Dow Jones and the tech heavy NASDAQ which has been up over 2% over the past week. Usually as stock market valuations edge higher and stocks become more expensive, we tend to see the technology stocks edge higher. From a Money Flow Index perfective, we are noticing stocks reaching record highs as investors continue to invest heavily in the financial markets. This is true for all the major indices as they suggest that we are due for a correction in the imminent future.
Our model portfolios have seen strong and sustainable gains with the uptake in the equity markets. By being well diversified between equities and non-equities, we are able to steam out some of the risks and skew the portfolios towards true growth. Following last weeks rebalance, we have sold down the FTSE 100 index and added the proceeds to a multi asset fund which has a strong asset allocation. Despite the current asset allocation, we remain cautious of the economic cycle and will start to dial down the high risk content in the portfolios as the economic data would suggest, however until then, we will remain fully invested into the markets.
The data above will not directly correlate to the indices as there is always a delay in pricing because the US markets close significantly later than the European markets and the Asian markets. The data set above reflects the last close and much of the days movements will not yet be reflected in the portfolios due to pricing delays. You cannot therefore directly correlate indices to the portfolios. The value of investments may fluctuate in price or value and you may get back less than the amount originally invested. Past performance is not a guarantee of future performance. Performance figures quoted include the fund manager charges but exclude other fees such as adviser, custodian, switch and/or discretionary investment management fees. Unless otherwise instructed and accrued, income is reinvested into the portfolio.
This Day in History
On this day in 1941, Operation Primrose captured the world-famous Enigma Machine. The British Royal Navy’s top-secret ‘Operation Primrose’ nets its quarry when the U-110 submarine is captured off Greenland. The Enigma machine and code book found on board will help Allied cryptographers crack coded messages sent by the Germans in the second world war.
As always have a wonderful week and stay safe.
Jason Stather-Lodge CFP, MCSI, APFS
CEO & Founder
Chartered & Certified Financial Planner
Chartered Wealth Manager