Market Commentary – 15th March 2017
All eyes on the Fed and the Article 50 bill passed by parliament!
The US markets have paused for breath ahead of the Fed’s decision later today, however, we have seen strength in the equity markets in the UK, Europe and Asia over the last week. Markets are still being spurred by improving global economic data and continuing reflation. With the Fed concluding their monetary policy meeting later today, the expectations of a US rate rise appear almost certain. This follows stronger US inflation, hawkish comments from several FOMC voting members last week and Friday’s positive jobs report.
Theresa May’s Article 50 bill has cleared all its hurdles in the Houses of Parliament, paving way for the prime minister to trigger Article 50 by the end of March. Peers accepted the supremacy of the House of Commons late on Monday night after MPs overturned amendments aimed at guaranteeing the rights of EU citizens in the UK and giving parliament a “meaningful vote” on the final Brexit deal. This came after a short period of so-called “ping pong” where the legislation bounced between the two houses over disagreement on the issues.
Earlier this week Nicola Sturgeon said she wants another Scottish independence referendum before the UK leaves the EU, which is likely to be at the end of March 2019. Theresa May has a difficult path to tread. It is thought she accepts the principle of a vote, but is unwillingly to transfer the powers until after Brexit, stating that now is not the time for a referendum. Scotland can hold a referendum if the Scottish Parliament, and both Houses of Parliament agree to trigger section 30 of the 1998 Scotland Act. Support for Scottish Independence is at its highest recorded level, according to a study by ScotCen Social Research, although the popularity of the European Union has fallen in Scotland, which voted against Brexit last year. Researchers say this suggests focusing on EU membership may not be the best way to persuade voters to choose to leave the UK.
As I write, plans to increase National Insurance Contributions for the self-employed, announced in the Budget last week, have been dropped. Chancellor Philip Hammond has said the government will not proceed with the increases which were criticised for breaking a 2015 Conservative manifesto pledge. Mr Hammond’s Budget announcement would have increased Class 4 NICs from 9% to 10% in April 2018, and to 11% in 2019, to bring it closer to the 12% currently paid by employees.
Global Economic News
In the UK, it has been a relatively quiet week for economic data. January’s monthly output numbers appeared to disappoint. Industrial production dropped by 0.4% on the month, with the dominant manufacturing sub-component seeing a 0.9% contraction. Construction output also fell by 0.4%. However, these falls should be set against a strong end of 2016. Three-month-on-three-month growth in manufacturing hit a near seven-year high of 2.1% in January. Growth rates in both industrial and construction output were revised up in Q4, from 0.3% to 0.4% and 0.2% to 1%, respectively. This proffers a reasonable chance that the rise in overall GDP might be pushed up from 0.7% to 0.8% when the ONS publishes the National Accounts for Q4 on 31 March. While a consumer slowdown looks set to weigh on services output this year, a better performance from other, albeit much smaller, parts of the economy should help limit the extent of a slowdown in overall activity. The UK unemployment rate fell to 4.7% in the period between November and January 2017, below market expectations of 4.8%. Average weekly earnings including bonuses rose 2.2% year-on-year in the three months to January 2016, following a 2.6% increase in the previous period and below market expectations of 2.4% rise.
In Europe, the focus was on Mario Draghi’s comments following this month’s ECB policy meeting. While ECB President Draghi stuck to his familiar dovish stance, it was hard to completely mask the sense of communication put forward by the committee. With growth and inflation both picking up, ultimately the real
message was ‘job done’ and the next move in rates will be up. The outcome, therefore, was no change to rates or extending the asset purchase programme any further. Draghi himself acknowledged, barring a political accident, the future course of monetary policy is now likely to be determined by what happens to wages. Right on cue, this week’s German labour cost data pointed to the fastest pace of quarterly expansion since Q4 2008. It looks very much as though workers are increasingly demanding higher nominal wages to maintain growth in real wages in the face of higher inflation.
In the US, the dominant data release was nonfarm payrolls. Overall, the data did not disappoint. The labour market remained very solid last month as nonfarm payrolls increased 235,000, the unemployment rate ticked down to 4.7% and average hourly earnings rose 2.8% year on year. The Fed is likely to view this latest employment report as a sign that it is very close to fulfilling its mandate of full employment, and that now is the time for another rate hike when the Fed committee meeting concludes today.
US Earnings – As of 9th March, (with 99% of the companies in the S&P 500 reporting actual results for Q4 2016), 65% of S&P 500 companies have beaten the mean EPS estimate and 53% of S&P 500 companies have beaten the mean sales estimate. Earnings Growth: For Q4 2016, the blended earnings growth rate for the S&P 500 is 4.9%. 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 moving upwards and correspondingly valuations falling. This was the common theme across the UK, Europe and the US. With US rate rises on the horizon and inflation slowly rising in Europe, we still expect to see yields rising, accepting that political uncertainty can see a flight to the ‘perceived’ safety of bonds, which would be positive for valuations. 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 is flat against the dollar over the last week, and is still comfortably within our expectation range. This masks the sharp dropped early yesterday, with sterling testing the lows of 1.21 against the dollar, following the Article 50 bill being passed in parliament and continued chatter of a possible second Scottish Referendum. Some of the losses have pared back today, with the dollar weaker ahead of the Fed meeting. Sterling is weaker against the euro, falling back to below 1.15, continuing the weakening that was seen in the week previous. This comes off the back of a strong Euro at the end of last week, following the statements from the ECB’s monetary policy meeting. We are beginning to see further downside risks for sterling, associated with Brexit and softer UK economic data and will continue to keep a close eye, as a weaker sterling is positive for our overseas assets.
- GBP / USD – Range 1.25 – 1.10 – Today 1.22
- GBP / EUR – Range 1.20 – 1.10 – Today 1.15
- GBP / JPY – Range 150 – 125 – Today 139.7
Oil is down sharply over the week and is trading at $48.68 for WTI Crude and $51.84 for Brent, down over 7% for WTI and 6% for Brent. Record crude stockpiles and rebounding production in the U.S. suggest that the curbs by OPEC and Russia aren’t working fast enough. US shale production has hit back strongly. The US Energy Information Administration sees output rising 300,000 barrels a day to 9.2m b/d in 2017 before adding a further 500,000 b/d next year. The increasing supply story, along with stable global demand has weakened the recent price stability that has been present in the oil market. Following the drop in prices over the last week, oil is trading slightly below our expected range of $50-60 / barrel and there does appear to be a more bearish case in the short term, however, the next OPEC meeting on 25 May will certainly draw attention and give some guidance on where production and inventories might be as we progress through the year.
Gold is down by another $13 / troy ounce this week and is currently trading just above $1,200 / troy ounce. This continued movement downwards follows the risk on stance that has been seen over the last few weeks and the expectation that US rates may rise quicker than the market anticipated, with comments suggesting a rate rise could be likely at today’s Fed meeting. This has been longest losing streak for gold since November 2016. We do not expect much upside potential in the current risk on environment, and although it is a good diversifier, unless we see risks of a soft Brexit decrease and sterling falling substantially, there is no gain to be made accepting it is a safe asset. Overall, we are not seeing an indication of a risk off stance, which is the purpose of this barometer.
Model Portfolios & Indices
Over the last week, we have seen the vast majority of market indices that we track move higher for the week. In the US, the S&P 500 and Dow Jones were down marginally for the week, but this comes of the back of these indices continually probing new highs. The strongest performance was in Asia, with the Nikkei 225 in Japan and the Hang Seng in Hong Kong both advancing. Europe also performed well and was broad based amongst the major EU countries, with the Spanish IBEX post the largest gain.
This strong performance in equities has helped the model portfolios all to perform exceptionally well. Contributors to portfolio performance were broad based, with global equity, Asian equity and European equity funds performing well and the weakness of sterling also helping to boost the value of overseas assets.
All portfolios, bar OBI 5 which was only 0.05% behind, outperformed their benchmark. Performance over all time horizons detailed below has been strong, with each portfolio delivering positive performance at each of the horizons. The portfolios remain well positioned to capture the benefits of the reflation trade.
Within the portfolios, we have seen some of the positions exceed their expected 6 month return target after only 11 weeks and this has triggered a subcommittee meeting where we reviewed the economic data and determined whether we are at a point where risks have increased or the whole data set as moved up.
We have decided to not take any profits on these positions as the economic data we are looking at has improved since we set the forward guidance in January. We feel that the range has moved up, so the value at risk on the positions has not become higher than we originally set in January. We feel the negative value at risk we set in January is still the same despite the growth in asset values since. We are therefore comfortable for now that the risks in the portfolios are as balanced now as they were at the beginning of January, despite the positive momentum in the intervening period.
We will review these positions in full continually between now and the next full investment committee meeting and monitor the economic data to ensure this position remains unchanged. These are nice problems to have and we continue to monitor and evaluate and watch the economic data.
This day in History
On this day in 1985, the world’s first internet domain name is registered. Symbolics.com was registered by the Symbolics Computer Corporation of Massachusetts. There are over 1 billion domains today.
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