Backseat drivers

Investors took a second referendum on the UK’s Brexit deal last week: the result was a resounding no.

Sterling fell another 1.6% and housebuilders and domestic banks got clobbered. Royal Bank of Scotland was down roughly 13%. But utilities – your garden variety defensives – have also had a tough time. So, like the referendum of 2016, it’s unclear exactly what the market’s answer means. General falls in the FTSE could be simply that people want high returns to account for the greater uncertainty that comes with a transition period and myriad unanswered questions. Slumps in utilities seem to be a nod to the greater chance of a general election which could usher in a Labour government and nationalisation. The hit to banks and homebuilders seems to be a forecast of much lower property prices due to a hard Brexit, as the Bank of England warned about a few months back.

We think the chances of a leadership challenge are roughly a coin toss. There has been a lot of anger and noise and cries of vassalage from everyone. Which is why the Conservative rebels’ inability to gather the 48 votes to open the field to replace Theresa May as Prime Minister is illuminating. It could yet get over the line, but at that point it seems likely that Mrs May would be victorious. Who would her opponents be? Jacob Rees-Mogg? Boris Johnson? Michael Gove? Dominic Raab? Andrea Leadsom?  Who – if any of them – would have the support to carry 159 votes? Besides, if they did upend their leadership, the chances of another election grow and with it the potential for them to pass the reins of power to Labour.

Everyone is upset with the draft deal Mrs May presented. Northern Ireland isn’t happy, the remainers aren’t happy, leavers aren’t happy. But to be fair, it was always going to be this way. A tortuous halfway house that retains access to our largest trading partners but cedes any input to making trade rules, that limits immigration from the Continent but retains favourable treatment for them; fewer future payments to the bloc, but a large Brexit bill to pay our share of pensions and other long-term obligations; and, to top it off, a United Kingdom split by the Irish Sea. Unfortunately, the EU has stringent rules that we don’t want to live by. And we don’t want a recession or lorries lining up on decommissioned motorways to make it through the ports. We can’t have it all, as defeatist or realistic (depending on your stance) as that sounds. And the only ones clamouring for recession are those not in the driving seat. These backseat drivers had the chance to take the wheel, but for now they are balking. 

Source: FE Analytics, data sterling total return to 16 November

 

Clouds of silver

It’s been a sullen autumn, with flighty investors sending prices reeling in and out like a fish on the line.

Yet for all the gloom and worry, there are silver linings out there. UK investors were sheltered somewhat from poor global markets by weaker sterling last week. As reasons for outperformance go, that’s a pretty rubbish one. But look around at other economic data: UK inflation undershot expectations, coming in at 2.4%, the same as the previous month. Meanwhile, UK wage growth hit its highest in almost a decade, up 3.2% excluding bonuses for the third quarter compared with a year ago. UK PMIs are still in positive territory, although property remains a weak spot and retail sales growth fell slightly on the previous month and business optimism was softer.

Oil prices have slipped precipitously over the past couple of months, gradually at first then suddenly. Worries about slowing demand, particularly from China, drove this. More recently, investors believe there’s a supply glut in the offing – and not from your typical culprits either. The US is now the world’s largest producer of crude, driven by shale volumes soaring almost a quarter on a year ago. OPEC is moving to cut its output to shore up the price, but the fall in oil prices have nervous investors worried about the end. This seems irrational. A 25% cut in bills should be a boon for energy importers, especially China and India. With China and its neighbours coming in for a dose of pain because of American tariffs, this seems a nice little consolation gift.

It would have a similar impact on many European countries as well. That’s helpful given the political climate looks ropey as the EU attempts to stare down Italy in a showdown over the nation’s Budget. The issue here is not Italy’s deficit, which creeps just beneath the 3% of GDP limit. It’s that the country’s debt to GDP ratio won’t be reduced, instead it is forecast to remain flat at 131%. Expect fireworks if the EU decides to slap Italy with the first fine for fiscal imprudence in the bloc’s history. Italian 10-year yields have ballooned well above German debt and are more than double those of Spain. The Italian/Spanish pair used to trade broadly in line. Meanwhile, economic data hasn’t been as horrible. the eurozone unemployment rate has been falling over the past 12 months and is currently 8.1%. Meanwhile, retail sales beat forecasts at their last print, up 0.8% on a year earlier. 

On the other side of the Atlantic, the US economy seems to be rolling on very nicely indeed. The US Federal Reserve is expected to hike its rate by 25 basis points to the 2.25-2.50% range at the December meeting. ISM and other business surveys are robust – confidence surveys are virtually all about as high as they get in the best of times. We get a few more pulse checks this week with the US Leading Index and University of Michigan surveys coming out on Wednesday, followed by Markit PMIs on Friday. Unemployment remains very low, even as more people rejoin the labour force.

Housing in the US appears to be the biggest worry for investors – aside from the omnipresent nightmares about an overly hasty Federal Reserve. Just a few months ago a revival in house prices augured another leg up for the US economy. Since then, the market has retreated significantly. Is that simply because many American cities have been working hard to alleviate skyrocketing rental costs and home values that are pushing out younger workers? Or is it something more sinister? A batch of dwellings data is out this week, including housing starts and permits on Tuesday and existing home sales and mortgage applications on Wednesday.

 Bonds

UK 10-Year yield @ 1.41%

US 10-Year yield @ 3.06%

Germany 10-Year yield @ 0.37%

Italy 10-Year yield @ 3.49%

Spain 10-Year yield @ 1.63%

 

Economic data and companies reporting for week commencing 19 November

 

Monday 19 November

UK: Rightmove House Prices

US: NAHB Housing Market Index

EU: Current Account, Construction Output

Final results: Diploma

 

Tuesday 20 November

UK: CBI Trends Surveys

US: Housing Starts, Building Permits

EU: GER: Producer Price Index

Final results: Compass Group, CYBG, El Group, easyJet

Interim results: AO World, Aveva Group, Accsys Technologies, Big Yellow

Trading update: CRH, Spectris

 

Wednesday 21 November

UK: Government Finances

US: MBA Mortgage Applications, Durable Goods Orders, Capital Goods Orders, Initial Jobless Claims, Continuing Claims, Existing Home Sales, University of Michigan Sentiment Survey

EU: Istat Economic Forecasts (2018 and 2019), OECD Economic Outlook

Final results: Countryside Properties, Marston’s, Paragon Banking Group, Sage Group, SSP

Interim results: Babcock International Group, Liontrust Asset Management, TalkTalk Telecom, United Utilities

Quarterly results: Kingfisher

Trading update: Breedon Group

 

Thursday 22 November

EU: ECB releases Policy Meeting Minutes,Consumer Confidence

Final results: Euromoney Institutional Investor, Mitchells & Butler

Interim results: Assura, Charles Stanley Group, CMC Markets, First Property Group, Keller Group, Mothercare, Mitie Group, Severn Trent, Majestic Wine

Quarterly results: Bank of Georgia Group

Trading update: Centrica, Hill & Smith Holdings

 

Friday 23 November

US: Manufacturing PMI, Services PMI

EU: FRA: PMI Services, PMI Manufacturing; GER: GDP, Private Consumption, Government Spending, Trading Accounts, PMI Services, PMI Manufacturing

Final results: Future

Interim results: Fuller Smith & Turner, Record

Trading update: Origin Enterprises

Total votes: 30