Market Commentary – 14th June 2017

So, after all that…

The Conservatives won, but lost, Labour lost, but won. The SNP won and lost in Scotland but still won, and the Conservatives won in Scotland, but lost, UKIP lost but because of Brexit they’ve already won. The winner Mrs May, is being told to resign because she didn’t win and she won’t because she won even though she lost…. Only in the UK do we see wining as losing and losing as winning. One thing is for certain Mrs May probably wishes she had a time machine…

As regards to what next the only way that the Tories can get a queen’s speech through parliament is if she forms either a collation or a “confidence and supply” arrangement. It is likely that she will get a deal and that she will form a minority government. She is though mortally wounded and the Tory grandees will not want her in place for long. No one in reality knows what next and I firmly believe that we need a more centrist party leader in the Conservative or Labour party and if either can achieve that they will form the next government which could be in six months or five years.  As regards to the Brexit negotiations a hard Brexit is off the table and I feel that if we were to have another referendum now then the country would vote 60% / 40% to stay in as many that I talk too that voted out would now not, for many different reasons.

I am convinced that we will not have a hard Brexit and I am also convinced that there is now a 50 / 50 chance that we will never leave and we will end up back where we started and remain in Europe as we are today. There is a history of that happening over the years…

It’s been suggested that Jeremy Corbyn and Scottish Labour leader Kezia Dugdale aren’t on the same page over the issue of a second independence referendum. It’s been suggested that Jeremy Corbyn and Scottish Labour leader Kezia Dugdale aren’t on the same page over the issue of a second independence referendum. It’s been suggested that Jeremy Corbyn and Scottish Labour leader Kezia Dugdale aren’t on the same page over the issue of a second independence referendum.

Global Economic News

In the UK, Although the evidence mounts that the economy is experiencing a slowdown, this has yet to be evident in the jobs market. The three months to April saw employment grow by 109,000 to a new record high of 31.95m. Although a 50,000 drop in joblessness was not enough to push the Labour Force Survey (LFS) unemployment rate down from the previous 4.6%, this was still the lowest rate since 1975. With job vacancies staying close to a record high, the number of unemployed people per job vacancy remained at a record low of 2.0. That demand for workers continues to grow is almost certainly not unrelated to the fact that in real terms, those workers are on average getting cheaper. Headline (three-month average of the annual rate) growth in total cash pay slipped to 2.1% in April from 2.4% the previous month, the weakest since February 2016. On a single-month basis, the slippage was more striking, with April delivering a rise of 1.2%, half March’s 2.4% pace. This offers the MPC another reason to stand pat on interest rates when it meets tomorrow. With cash pay rises becoming much softer, increasing inflation exerted a correspondingly bigger effect on changes in real pay. On a headline basis, real pay fell by 0.4% in April, the first decline since August 2014. This isn’t great news for consumer spending, however cheaper workers are supporting high (consumption-friendly) employment levels which shouldn’t be ignored.

In Europe, Eurozone industrial production expanded by 0.5% over the previous month in April (and by 1.4% in annual terms), in line with the consensus expectation. The figure follows a revised 0.2% expansion in March (up from a previously reported 0.1% fall), and therefore the gap between actual output growth and the level implied by the business surveys such as the manufacturing PMI is starting to reduce. While the April figure was boosted by a surge in energy production – a component that is extremely volatile – production of durable consumer goods also saw a solid increase for a third consecutive month, a more indicative sign of underlying strength in the economy and of consumer resilience. Employment growth remained strong in the Eurozone, expanding 0.4% on the quarter in Q1 (1.5% in annual terms). With 154.8 million people employed in the Eurozone, employment finally surpassed its pre-financial crisis peak and reached its highest level ever. Among the big four, Spain continued to outperform (up 0.7%) as the strong cyclical recovery continues to boost high levels of job creation. Germany also saw a strong rise in employment (up 0.5%) despite its very tight labour market, whereas Italy and France experienced more modest increases (up 0.3% and 0.2% respectively). Solid employment expectations suggest that employment should continue to expand at a robust pace, which should partially offset the decline in real incomes this year owing to the rise in inflation. Given that inflation has already peaked in Q1 and that economic prospects continue to improve, it is expected that there is scope for household spending to strengthen in the coming quarters as consumers feel more confident about their economic situation and continue to reduce precautionary savings and spend more.

In the US, all eyes are on the Federal Reserve today as they are today expected to raise rates. If the Federal Open Market Committee (FOMC) decide to increase rates, due to the improving economic data that has been coming out of the US, the hike can further boost the US Dollar as it is understood as a sign of healthy inflation. It is anticipated that they will increase rates by 25 basis points. It is also speculated that the Fed officials will likely unveil the final plans for normalizing their balance sheet. They may also wind down the reinvestment policy which will start later this year and the Fed will take a very gradual approach by allowing only 50% of the debt securities to roll off in the first year (Q4 2017–Q3 2018), before fully ceasing reinvestments starting in Q4 2018. Looking further ahead, real GDP growth forecasts could rebound in Q2 while the unemployment rates may remain below 4.5% argues for another rate hike later this year. However, a notable downside risk stems from the fact that inflation will likely soften through mid-year, raising the possibility that the Fed may be reluctant to proceed with another rate hike in 2017.

Barometers

The Barometers below look at some of the data we review on a day by day basis and by having these detailed, it gives you some insight into what is happening.

US Earnings are important because if the US starts to slow down, then so does the rest of the world.

As of today (with 99.6% of the companies in the S&P 500 reporting actual results for Q1 2017), 75% of S&P 500 companies have beat the mean EPS estimate and 64% of S&P 500 companies have beat the mean sales estimate. For Q2 2017, the estimated earnings growth rate for the S&P 500 is 6.6%. Nine sectors are expected to report earnings growth for the quarter, led by the Energy sector.

UK & Non-UK Gilt Yields;

UK and Non-UK Government Debt are a good measure, as they indicate whether we expect the economy to improve or worsen, with rising yields reflecting positive environment and reflecting positive interest rate movements as we look out. The opposite with lowering yields as the expectation is worsening economic conditions.

Over the last week, we have seen bond yields decrease with corresponding valuations increase for Europe and the US. The opposite has been true for the UK with bond yields increasing with corresponding valuations decreasing. Volatility remains high in these assets which should not be functioning like this. This is a further example of why we are still not directionally investing into these assets.

GBP to USD/Euro/JPY;

We monitor the GBP rate to see how much of the returns are coming from underlying equity valuation increases and movements in the currency, to see if we should be locking in the gains and hedging the risks. We have changed our 12-month expected range for sterling across the US Dollar, Euro and Japanese Yen. This is to reflect a stronger pound, following Brexit, and less negative risk due to the UK economic data stabilising, and therefore uncertainty risk is dropping off. As Brexit matures, we expect Sterling to weaken over the coming months as negotiations set off and both sides prevaricate, then reappreciate towards year end to roughly where we are now or slightly higher.

Over the last week, sterling has dropped against the US Dollar from around 1.29 to 1.27 after the results of the general election, which resulted to a ‘Hung Parliament’. In addition to this, Sterling has remained relatively flat at around 1.27 and has been said to be building speculation that the new UK government will shift to a softer Brexit stance. The speculation has also been fuelled by the removal of David Jones, a minister in the Department for exiting the EU. It is going to be interesting how the new government will be able to soften the Brexit stance, which is easier said than done. A shift to a softer stance could alienate hard Brexit supporters within the Conservative party thereby making the new government even more unstable. Sterling has gained some recent momentum following strong inflation figures which were released yesterday.

GBP / USD – Range 1.32 – 1.20 – Today at 1.27 GBP / EUR – Range 1.22 – 1.12 – Today at 1.13 GBP / JPY – Range 150 – 130 – Today at 140.35

Oil Price;

We monitor the oil price as it is a strong indicator of global consumption when balancing the output and storage data. Strong supply and usage denotes a strong global economy. Opposite reflects underlying weaknesses.

The price of oil over the past week has dropped further. WTI Crude is currently trading at $45.92 and $48.26 for Brent, down approx. 4% for WTI and approx. 3% for Brent. Oil is continuing to drop since the agreement between OPEC and non-OPEC nations to extend output cuts with the intensions of increasing the price, however they have continued to drop since the group of Arab states closed transport links with Qatar, after accusing it for supporting terrorism. It is speculated that OPEC would grow twice as quickly in 2018 as it would this year, with US shale oil producers driving the growth. It further speculated that the outlook would make “sobering reading” for OPEC and its partners, which recently agreed to extend production cuts in a bid to support prices.

Gold Price;

Gold is a safe haven and a spike in price can be an indicator of increasing underlying economic concerns and as always, the opposite.

Over the past week, we have seen the price of gold decrease approx. $24 an ounce to $1268 a troy ounce. Gold has been constant this week as the markets await signals of future monetary tightening by the U.S. Federal Reserve and a Senate panel’s questioning of Attorney General Jeff Sessions about his dealings with Russian officials. Given the current price, investors have already found refuge in the haven asset, and this may continue until we get more clarity politically.

Model Portfolios & Indices

Over the last week we have seen most of the indices that we track improve. However, the NASDAQ fell considerably due to the technology sell-off early this week and the FTSE 250 did considerably well and is above 20,000 (again) after the results of the general election. Sterling slipped on weak wage growth figures from the Office of National Statistics (ONS) and currency traders are nervous ahead of a US Federal Reserve meeting later. A weak pound means the international profits of FTSE 100 firms are worth more when converted back in sterling. Also, Chinese indices have performed well given that the IMF has upgraded their growth outlook this year, boosting domestic confidence.

Following our comments from last week, we have successfully rebalanced our portfolios by reducing our equity exposure and adding the proceeds into a more defensive stance based on the current economic cycle. Since last week’s rebalance, our new repositioned model portfolios have performed well and our new positions are gaining ground with some of our older positions exceeding their 12 month targets.

We will maintain this defensive approach in our portfolios until we get further clarity on a few macro issues around Brexit and the Trump agenda, being his fiscal spending policy and the tax changes that were supposed to be significant and give rise to a surge in US spending in 2018.

This Day in History

On this day in 1847, Robert Bunsen invented the infamous Bunsen Burner. The Bunsen Burner is a common piece of laboratory equipment that produces a single open gas flame, which is used for heating, sterilization, and combustion. The gas can be natural gas or a liquefied petroleum gas, such as propane, butane, or a mixture of both.

 

As always have a wonderful week and stay safe.

VBW

 

Jason Stather-Lodge  CFP, MCSI, APFS
CEO & Founder
Chartered & Certified Financial Planner
Chartered Wealth Manager