Crunch time (again)

We don’t know about you, but over the past year or so we got into the habit of buying our travel money extremely far in advance of holidays.

Soon after the referendum result of 2016 – when sterling fell like an elephant with a ball and chain on its leg – there was a period when you held off because you thought the exchange rate could possibly, maybe, should be, better next week. That time of timid hope bled away when the pound slipped below €1.15 and camped out for more than a year.

But recently, we’ve started to rethink our approach. Sterling ticked up to €1.16 last week, pushing against a level that it has struggled to break through for years. Against the dollar, it got to $1.33, its highest point since June last year. As radicals on both sides of the Brexit divide simultaneously fold in on themselves, investors sniff a compromise in Westminster. About time too – spring’s approaching and another year of paying 20% over the odds for everything Continental is too devastating to contemplate. And another year of increased staycations could finally be the end of the creaking UK railway system …

So as we barrel toward the Article 50 deadline of 31 March, we believe the long-undervalued pound may be in for a bit of a comeback. Prime Minister Theresa May has promised that Parliament will vote on her compromise-compromise deal by 12 March. If Mrs May is defeated once again, a follow-up vote the following day will decide whether the UK will exit without a deal. And if Parliament rules against a no-deal the day after that a vote will be held to determine how long to delay the exit (it seems likely to be roughly three months). The appetite for a no-deal crash-out in the House of Commons seems very low indeed, and Mrs May has been using this while schmoozing solidly for the past few weeks in an attempt to get her plan over the line. She has unveiled a £1.6bn investment fund for left-behind towns and is rumoured to be promising unions that workers’ rights will be enshrined without dilution in a bid to get Labour MPs onside.

It’s worth noting that the Prime Minister’s investment fund is a one-off payment, replacing the loss of EU structural investment funding that equates to roughly the same amount of euros struggling English towns receive from the EU each year. But we’re at crunch time and a big pot of money and some promises may give beleaguered Labour MPs just enough cover to fulfil their constituents’ wishes without being seen to reverse course as if on a whim. Meanwhile, on the right, Jacob Rees-Mogg has said that Mrs May’s deal is preferable to staying in the EU and seems to be distancing himself from a hard Brexit. If he can keep his European Research Group colleagues from falling apart in acrimony over backstops and other red lines, Mrs May will be closer to hitting her required votes.

The tone in Westminster seems to have subtly changed in the last few weeks. And it’s reverberating through sterling.

Source: FE Analytics, data sterling total return to 1 March

Politburo pow-wow

As things look more promising for the UK, the rest of the world has been a bit dull on the economic numbers front. Eurozone manufacturing fell in to contraction while US manufacturing, household spending and consumer sentiment disappointed. 

There’s lots going on in other realms though: US President Donald Trump sat down (unproductively) with North Korean despot Kim Jong-un while his former lawyer told Congress his boss was a liar and a conman whose run for office was supposed to be just “the greatest infomercial in political history”. Meanwhile, Chinese and American negotiators have apparently been working feverishly to nail down a new arrangement for Sino-American trade. The final draft is expected to reach the surface soon and could even be signed and sealed within a few months. We’ve heard this many, many times before. But the timing seems right: China’s National People’s Conference kicks off on Tuesday and runs for 10 days.

The conference will set out the country’s new economic growth target, which is expected to continue decelerating. Most economists think the official number will be between 6 and 6.5%; China’s growth in 2018 was 6.6%, the slowest pace since 1990. But also on the agenda a foreign investment law, drafted just three months ago, that rewrites much of the rules for foreign companies operating in China. While short on details, the new law responds to complaints about the country’s intellectual property laws and how it treats overseas businesses operating in China. It could dovetail perfectly with a new trading relationship with the US.

Chinese leader Xi Jinping has done a good job of entrenching himself at the top of his nation’s bureaucracy. However, there are grumblings from his underlings and citizens about how he has managed the economy. Talk of unleashing private enterprise has given way to party commissars on private company boards and an avalanche of cheap credit for state-owned dinosaurs. Inequality of income and wealth have soared making for that strange irony: a communist nation is now one of the most unequal places on Earth. As China moves from the world’s factory to a more services, consumer-driven economy it will need to be deft and careful and lucky and have friends abroad if it’s not to fall into disarray. Mr Xi has no doubt been aiming for these attributes, but he has often come up short.

Fiscal stimulus has been a crutch for too many years now – particularly as it tends to flow to those older industries that China should really be weaning itself off. Given recent weakness, there is likely to be yet more government spending announced at the conference. Hopefully the meeting also leads to some better and more long-sighted policies from the politburo. Pouring money on a problem doesn’t always help, sometimes a bit of thought goes a long way. Chinese savings rates have fallen yet still appear to show that households aren’t spending everything they earn, but from the outside the country seems to be in the grip of a heavy materialistic fever. Luxury goods sell like hotcakes, the stock market and property prices are erratic as domestic cash sloshes around the nation like an overfull bathtub. Those old enough to remember the heady days of the “go-go ’80s” may see some similarities and get a bit nostalgic. And perhaps worry a little about how that sort of exuberance ends.

Are middle class Chinese households actually maxed out? What if spending growth – on an individual level for those already well-off – is unlikely to rise much from here? That’s not to say that consumer growth in China is done, far from it. There are millions of families in the regions who get by on virtually nothing; a significant boost to their incomes should tap a reservoir of potential growth. But the government has to help the economy make it to these mostly forgotten areas. Recently, it has done much more to shut off these people from wealth than it has to help them improve their lot. As the economy grows ever larger and the pace of its expansion continues to slow, the impact of good – or bad – polices will become all the more pronounced.

Bonds

UK 10-Year yield @ 1.30%
US 10-Year yield @ 2.75%
Germany 10-Year yield @ 0.18%
Italy 10-Year yield @ 2.73% 
Spain 10-Year yield @ 1.20%

Economic data and companies reporting for week commencing 4 March

Monday 4 March 

UK: Construction PMI
US: Construction Spending
EU: PPI

Final results: Bank of Cyprus Holdings, Greencoat Renewables, Johnson Service Group, Keller Group, Senior
Interim results: Abcam, Litigation Capital Management Limited, Ruffer Investment Company 

Tuesday 5 March

UK: BRC Sales Like-For-Like, PMI Services, Official Reserves
US: PMI Services, ISM Non-Manufacturing/Services Composite, New Homes Sales, Monthly Budget Statement
EU: Retail Sales; ITA: GDP

Final results: Apax Global Alpha, BioPharma Credit, Direct Line Insurance Group, 4Imprint Group, GVC Holdings
Quarterly results: Ashtead Group 

Wednesday 6 March

US: MBA Mortgage Applications, Trade Balance, Fed Beige Book
EU: OECD Interim Economic Outlook

Final results: Tritax Big Box REIT, Costain Group, Foresight Solar Fund, Glenveagh Properties, Headlam Group, Just Eat, Legal & General, Paddy Power Betfair

Thursday 7 March

UK: Halifax House Prices
US: Initial Jobless Claims, Unit Labour Costs, Consumer Credit
EU: Unemployment Rate, GDP, ECB Decision

Final results: Admiral Group, Alfa Financial Software, Aviva, Cobham, Cairn Homes, Countrywide, Funding Circle Holdings, Greggs, Informa, Inmarsat, NMC Health, Spirent Communications
Interim results: Inland Homes

Friday 8 March

US: Housing Starts, Building Permits, Nonfarm Payrolls, Average Hourly Earnings
EU: GER: Factory Orders

Final results: SIG