Market Commentary – 22nd February 2017
Strong data from the US and a positive week for markets.
Over the past week, we have seen markets continuing the reflation trend, with new highs being reached in the US, following more strong economic data. The CBOE volatility index has remained at very low levels and a number of the barometers that we monitor are also indicating a lack of negative sentiment, despite the uncertain political backdrop. Continued positive economic data is really helping the positive momentum that has been seen of late and keeping the reflation rally on track.
In Fed Chair Yellen’s semi-annual testimony to Congress on monetary policy, Yellen reflected upon the upbeat tone of the late-2016/early-2107 economic data, painting a picture of sustained moderate growth, a robust labour market, and a pace of inflation that is returning towards the Fed’s 2% core objective. Overall, the tone of her comments was mildly hawkish and was consistent with gradual rate hikes this year. Yellen reiterated “waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly”, providing a hawkish tone to her testimony.
Chancellor of the Exchequer, Phillip Hammond, received some welcomed news this week when the Treasury recorded a surplus of £9.4bn in the January net borrowing figures. This was the best January surplus figures for 17 years and was ahead of the expectations. January is a month where the government receives a significant proportion of its tax receipts and with economic growth stronger than anticipated prior to the EU referendum, both Corporation and Income Tax receipts were higher. This has eased the pressure on Hammond’s annual deficit reduction target, however, it has been reported that it is unlikely to significantly sway the direction for Budget day on 8 March. It may, however, give Mr Hammond some room to manoeuvre on the contentious topic of business rate increases, which would leave some firms with significantly higher business rates.
Prime Minister, Theresa May, attended the House of Lords yesterday to watch peers debate the Article 50 bill which will trigger the start of negotiations about Britain’s exit from the European Union next month. Lords are expected to vote on the bill next week.
With Budget day in two weeks and Article 50 due to be triggered by the end of next month, we are expecting March to be a busy month and we will be keeping a very close on eye on the markets.
Global Economic News
In the UK, the unemployment rate for December 2016 remained unchanged at 4.8%, in line with forecasts. Average earnings including bonuses grew at 2.6% for December, down by 0.2% from the month previous, and down 0.2% against the consensus forecast. Retail sales figures for January fell 0.3% month on month, which was somewhat disappointing. Following drops in November and December, the consensus of economists had expected some recovery in January. It was a case of déjà vu with respect to the economic data, as higher inflation and subdued wage growth continued to steadily ratchet up the pressure on consumers. January’s soft retail sales data suggests that the impact is now starting to be felt on the high street.
In Europe, the latest round of PMI data for the Eurozone continue to paint a very positive picture of near-term prospects. The flash composite PMI rose to 56.0 in February, up from 54.4 in January, and was the highest in approximately 6 years. This positive momentum was clear in solid expansion in order books and job creation, while inflationary pressures have continued to intensify. Euro Area inflation for January was 1.8% year on year, with core inflation coming in at 0.9% year on year.
In the US, CPI Inflation surged forwards in January. Headline CPI was up 0.6%, the strongest monthly gain in for approximately four years. Core CPI rose 0.3%, slightly firmer than expected. Overall CPI was up 2.5% year on year, the strongest pace since March 2012. Core inflation was up 2.2% year on year, above the 2% threshold for a 14th consecutive month. Retail sales were up strongly in January, rising 0.4%, which was more than expected and following an upwardly revised 1.0% gain in December. Headline sales are up 5.4% year on year, the fastest annual pace since March 2012, while core sales are up 4.0% from a year ago. This strong data is very promising and supportive evidence for the Fed raising rates this year.
US Earnings – As of 17 February, (with 82% of the companies in the S&P 500 reporting actual results for Q4 2016), 66% of S&P 500 companies have beat the mean EPS estimate and 53% of S&P 500 companies have beat the mean sales estimate. Earnings Growth: For Q4 2016, the blended earnings growth rate for the S&P 500 is 4.6%. The fourth quarter will mark the first time the index has seen year-over-year growth in earnings for two consecutive quarters since Q4 2014 and Q1 2015.
UK & Non-UK Gilt Yields; Over the last week we have seen bond yields edging downwards and correspondingly valuations rising. This was the common theme across the UK and the US. In Europe, the opposite occurred with yields edging upwards and valuations coming down. Whilst 2-year German Bund yields have dropped to a fresh record low of -0.9%, amongst continued purchases under the ECB’s bond-buying measures, the yield spread over Euro Area countries against German bunds has widen. This is notable in France, where the spread on 2 year bonds against German bonds has reached the widest point since May 2012, amongst rising fears of a potential Le Penn victory in the French elections. Whilst this week’s movements are contrary to our view of further strengthening of bond yields and a corresponding fall in valuations, political uncertainty can steer bond yields in the short term. Volatility remains high in these assets that should not be functioning like this, which is a further example of why we are still not directionally investing into these assets.
GBP to USD/Euro/JPY;
Sterling has traded within a tighter range of 1.238 to 1.252 against the dollar in the last week. Against the dollar, sterling is at the upper end of our range, just below 1.25. Sterling has traded within a wider range of 1.164 to 1.19 against the euro, with sterling strengthening from 1.17 towards 1.19 at the beginning of this week. As always there is a variety of factors affecting the exchange rates, with sterling weaker last Friday following the softer retail sales data and daily gyrations following economic data releases in the UK, Europe and US. For now, we still believe sterling is range bound, with it currently towards the top of our estimates, as further downside risks associated with Brexit have yet to materialise in the short term, however there is likely to be a lot more activity over the next few months, to which we will be watching with a keen eye.
- GBP / USD – Range 1.25 – 1.10 – Today 1.25
- GBP / EUR – Range 1.20 – 1.10 – Today 1.19
- GBP / JPY – Range 1.50 – 1.25 – Today 141
Oil is up approximately 1% on the week and is trading at $54.05 for WTI Crude and $56.39 for Brent. Mohammad Barkindo, secretary general of OPEC, told a conference on Tuesday that January data showed conformity from member countries in the output cut at above 90%. This is helping to provide a floor to oil prices, despite the risk of US shale production ramping up and significant oil inventories accumulating in the US. Over the month, prices are up around 2%. Oil is still trading within our expected range of $50-60 / barrel.
Gold is up over the week by approximately $14 / troy ounce and is currently trading at $1,237 / troy ounce, which Is the level we were at two weeks ago. Gold is still well above the December lows of $1,130 and is considerably below the $1,350 level reached in September 2016. The movements over the last two weeks match our view that gold remains range-bound for now and with the expectation of further rate rises in the US, these will likely weigh on gold. We do not expect much in the way of price movement and although it is a good diversifier, unless we see risks of a soft Brexit decrease and sterling fall, there is no gain to be made accepting it is a safe asset. We are certainly not seeing any indicators of a risk off period, which is the purpose of this barometer.
Model Portfolios & Indices Over the week, we have seen most market indices that we cover advancing. The US market was the strongest performer overall, up around 2%, with the Dow Jones, S&P 500, Nasdaq and Russel 2000 all reaching new highs. European equities also advanced, with the broad-based Euro STOXX 600 gaining 0.9%, however, the performance by country was mixed. Germany equities performed well, whilst France and Italy lagged. The FTSE 100 and 250 were broadly flat over the week, noting that their performance has been strong over the last few months, with the FTSE 250 coming off the back of a new high last week.
Strength in equities over the last week has helped the model portfolios all to perform exceptionally well. Performance was considerably stronger than last week, with all portfolios comfortably outperforming their benchmarks over the week. Global equity funds, with their considerable exposure to the US, have contributed extremely well, along with a positive contribution from European equity funds. The performance of the portfolios has been very positive and demonstrates that they are well positioned to benefit from the reflation trade.
We will continue to monitor the economic data and should things change that require our action, we will step in to act in your interests.
This day in History
In the early hours of this day in 2006, a Gang of at least six men committed the largest robbery in British history. In total, £53 million was stolen from the Securitas bank depot in Kent.
The plot was well planned. On the evening before, two men, dressed as police officers, pulled the depot manager, Colin Dixon, over as he was driving. Dixon and his family where held hostage and then forced to go with the gang to the Securitas depot, where Colin aided them evade the building’s security system. The gang proceeded to tie up 14 depot staff members, load the £53 million into a truck and, at about 2:15 a.m. on February 22, drive away.
Remarkably, no one was injured in the robbery. As the stolen money was all in used notes, it was difficult to trace. Securitas and its insurers posted a £2 million reward for information leading to the arrests of the robbers and return of the money.
Police continue to investigate the case, and more than 30 people have been arrested. Police are also said to have recovered nearly £20 million of the stolen money.
As always have a great week and we will continue to watch and evaluate and if anything changes we will let you know.
Jason Stather-Lodge CFP, MCSI, APFS
CEO & Founder
Chartered & Certified Financial Planner
Chartered Wealth Manager