Chequers

<p>There’s nothing like an off-site to get everyone back on the same page.</p> <p>The warring UK Cabinet is meeting this Friday at the Prime Minister’s country house, Chequers, in the Chiltern Hills. Theresa May’s top ministers have been at loggerheads since her election – we all know how divisive Brexit can be. However, things have got a bit out of hand over the past few weeks. Cabinet members have gone increasingly rogue without censure, exposing just how fragile the Prime Minister is.</p>
2 July 2018

There’s nothing like an off-site to get everyone back on the same page.

The warring UK Cabinet is meeting this Friday at the Prime Minister’s country house, Chequers, in the Chiltern Hills. Theresa May’s top ministers have been at loggerheads since her election – we all know how divisive Brexit can be. However, things have got a bit out of hand over the past few weeks. Cabinet members have gone increasingly rogue without censure, exposing just how fragile the Prime Minister is.

And so, political pundits believe an all-day Chequers conference will be make or break for the government. Ostensibly, the form of UK’s relationship with the EU is the sole item on the agenda. But, that issue is inseparable from Mrs May’s leadership. Brexit means Brexit is haunting her. There are some whispers from Whitehall policy wonks that the situation is so dire that a snap election may be imminent.

Scuttlebutt aside, there is still a chance – however slim – that the government will emerge from Chequers with a plan acceptable to both remainers and leavers; a realistic strategy that the government can negotiate in good faith with the EU. Business leaders, once relatively optimistic, have recently dropped their hopeful tone. Many have become worried about the chaos that surrounds the government’s Brexit strategy, especially when it became clear that ideology trumps pragmatism for many of the Cabinet. The FT reported that Brexit Secretary David Davis spent just four hours talking with European counterpart Michel Barnier this year – not exactly an encouraging message for chief executives stressing over how the split will affect intricate supply chains. Threats of exodus by some of the country’s largest companies may be just the shock the Cabinet needs to nail down a reasonable compromise.

If they can pull it off, next week will be hard-hitting indeed. In theory, we could have a 100-page Brexit whitepaper detailing the plan for Brexit, a visit from US President Donald Trump, a Nato summit and a World Cup final between England and Russia.

Source: FE Analytics, data sterling total return to 29 June

Round 2, fight!

Tesco has fired the latest shot in what could become another great battle in the UK supermarket wars. 

In a deal announced Monday, Tesco is teaming up with Carrefour, the largest supermarket chain in Europe, in a buyer alliance that should help it squeeze shared suppliers on prices.  Set for a three-year trial, the alliance could become permanent if successful. In a slightly Orwellian turn of phrase, Tesco said the move will help “strengthen their relationships” with suppliers. It’s probably safe to say suppliers won’t be popping champagne.

Fierce competition in the UK grocery market has been brutal so far this decade, with lower-cost European rivals stealing significant shares from the big name supermarkets. How the old guard have reacted has been interesting to watch, yet painful for anyone investing in them. Morrisons linked up with Amazon, hoping to ride the company’s runaway success and help it bolster its British online grocery business, while Sainsbury’s took a similar tack in buying Argos to improve its technology and gain a fully functioning distribution network. It soon realised that wouldn’t be enough, and in May announced a tie-up with Asda, the UK arm of American retailer Walmart. If approved by the competition regulator, Sainsbury’s Asda would overtake Tesco to become the country’s largest grocer with 32% market share. Tesco’s response makes sense. It is almost definitely too big to get any substantial merger past the Competition and Markets Authority, but the Carrefour alliance gives them the scale to combat Sainsbury’s Asda without controlling more of the market.

Of course, as sound as the strategies have been, it doesn’t negate the fact that UK supermarkets are a killzone for investors. The industry has all the ingredients of a race to the bottom, with consumers likely to be the only winner.

Independence Day means the US markets will be closed on Wednesday. The following day, the US Federal Reserve (Fed) releases its minutes from the mid-June meeting. We are interested in how the global trade tensions impacted the Fed’s discussion. The US central bank has been adamant about stepping up its rate hikes and its latest line is that it will follow the two 25-basis-point moves in the first half of 2018 with another two in the second half. Any equivocation from that stance will likely cause a bit of volatility, especially for the dollar and US Treasury markets.

If the Fed is planning to slow down, we think it would probably have two broad effects: It would push the value of the dollar down and reduce short-term yields. A lower dollar would feed through to myriad markets, but, most directly, it would push up the price of oil and other commodities. As for short-term yields, these are most sensitive to monetary policy. A fall in short-term yields, all else being equal, would increase the yield difference between the 1-year bond and the 10-year bond. This “steepening” of the yield curve would be reassuring for those investors who are worried about an “inversion” in the curve. Whenever the yield of a 1-year bond moves higher than that of a 10-year bond – inversion – it almost always ends with a recession. This difference between the 1-year and 10-year US Treasury yield is at 51bps today, easily the lowest level since the global financial crisis.

A bit of breathing room here could do wonders for the investment mood. The US economy is in fine fettle and inflation is under control: perfect conditions for equity markets. Then all we’d need is for all the tariff threats to melt away …

Bonds

UK 10-Year yield @ 1.28%
US 10-Year yield @ 2.86%
Germany 10-Year yield @ 0.30%
Italy 10-Year yield @ 2.67% 
Spain 10-Year yield @ 1.32%
 

Economic data and companies reporting for week commencing 2 July

Monday 2 July

UK: PMI Manufacturing
US: PMI Manufacturing, Construction Spending, ISM Manufacturing, ISM Prices Paid
EU: PMI Manufacturing, Unemployment Rate; GER: PMI Manufacturing

Interim results: Eve Sleep

Tuesday 3 July

UK: PMI Construction
US: Factory Orders, Auto Sales
EU: Retail Sales, Producer Price Index

Interim results: Harwood Wealth Group, Reach, RM, St Modwen Properties
Trading update: Costain Group

Wednesday 4 July

UK: BRC Shop Price Index, PMI Services
US: MBA Mortgage Applications
EU: PMI Composite, PMI Services; GER: PMI Composite, PMI Services

Interim results: Staffline Group
Quarterly results: Sainsbury (J)
Trading update: Mattioli Woods, Topps Tiles

Thursday 5 July

US: Continuing Claims, Initial Jobless Claims, PMI Composite, PMI Services, ISM Non-Manufacturing, Crude Oil Inventories
EU: GER: Factory Orders 

Final results: PurpleBricks Group, Superdry
Quarterly results: Ferrexpo 
Trading update: Associated British Foods, Bovis Homes Group, Electrocomponents, Empiric Student Property, Great Portland Estates, Persimmon

Friday 6 July

UK: Halifax House Price Index 
US: Balance of Trade, Non-Farm Payrolls, Unemployment Rate
EU:GER: Industrial Production