Losing control
Today Theresa May has to present her alternative Brexit plan to Parliament. Facing a hostile House of Commons, the Prime Minister says she won’t do so. Instead, she will reiterate that she is continuing to negotiate with the EU in a bid to unpick the Gordian knot of the Irish backstop. In a chilling echo through time, while Mrs May was trying to shore up support among English Brexiteers a bomb blast shook Londonderry. An IRA splinter group took responsibility. According to one version of history, Alexander the Great untied the impossible knot by cutting it.
Mrs May continues to insist she can get a version of her compromise deal agreed, even while admitting she is yet to nail down a firm plan B. To us, the process appears to be slipping farther from her grasp as Parliament takes ever greater control. Pressure to extend the Article 50 deadline will only increase from here. Given sterling’s muted response this morning, we believe this result is already partially baked in.
Meanwhile, the real world continues to run out of steam as it waits for the Westminster bubble to come up with a plausible strategy. UK retail sales growth decelerated in the final quarter: excluding fuel, retail sales were 3.5% higher than a year earlier, down from 4.2% expansion in the three months to November’s end. The CBI Trends Surveys will give more insight to the UK high street when they are released on Wednesday. But before then, on Tuesday, there will be a couple of lagged measures looking at the British consumer directly. The unemployment rate is expected to remain flat at 4.1% and average weekly earnings growth steady at 3.3%.
Source: FE Analytics, data sterling total return to 18 January
Who needs government?
Equities have continued to recover this year, with the S&P 500 on Friday closing up 13.7% from its December lows.
Fears that the Federal Reserve will sleepwalk itself into overtightening have lessened. Steve Mnuchin has been making positive noises about an agreement with China, which were followed by China reciprocating later in the week. As for Chinese growth, the numbers coming out of the world’s second-largest economy are ugly. GDP growth was 6.6% in 2018, the slowest expansion since the Tiananmen Square massacre led to growth-crushing global sanctions. The nation’s economy is much, much larger than it was then, however. We continue to have cautious confidence in China’s ability to navigate the bumpy road to a more modern economy. Retail spending growth accelerated marginally in December, albeit off an 18-year low in November. China’s property market has been in the doldrums for some time now, following a long, unsustainable period when it was pumped up by lots of debt-driven government stimulus. This cannot be unwound without a bit of pain. Lots of Chinese consumption was predicated on this bubble in real estate, so a retrenchment in household spending should be expected. Retail spending growth of 8.2% is still pretty hefty. We believe the economy is not on its way to recession, or that its demand will slow to a point that would drive other nations’ growth into reverse.
Investors don’t seem to care a jot about the partial shutdown on the US government. US housing starts and retail sales are due to be released on Wednesday, but with the government shutdown entering its fifth week these numbers may not be released. The Labor Department remains open because its funding was agreed earlier in 2018, but the departments of commerce and agriculture have been furloughed. As has the Commodity Futures Trading Commission, which usually details weekly reports on trading positions.
Martin Luther King Day today means US markets will remain closed in solidarity with its government.
Single-pricing
As we’ve previously communicated, from today our fund units will move to a single-price, dropping the current dual-price system. Rather than have a buy price and a marginally lower sell price, a single price will be issued for our funds at noon each day. Both purchases and sales of units will be based on this single price. In line with the industry, we intend to operate a ‘swinging’ single-pricing mechanism for our funds. This ensures the fair treatment of all unitholders by minimising the effects of the ‘dilution’ that occurs when stocks are bought and sold. The single price will swing in response to large purchases or sales in order to mitigate these effects. Once the single price of a unit has been determined, a ‘dilution adjustment’ will be applied to the price in accordance with the policy outlined in the prospectus for our funds. For example, when there are net inflows to a fund, a dilution adjustment increases the price (price swings up) and when there are net outflows from a fund, a dilution adjustment reduces the price (price swings down). However, regardless of whether the price is adjusted up or down, all investors buy and sell at the same price.
Bonds
UK 10-Year yield @ 1.35%
US 10-Year yield @ 2.78%
Germany 10-Year yield @ 0.26%
Italy 10-Year yield @ 2.73%
Spain 10-Year yield @ 1.34%
Economic data and companies reporting for week commencing 21 January
Monday 21 January
UK: Rightmove House Prices
EU: GER: PPI
Final results: Premier Veterinary Group
Tuesday 22 January
UK: Unemployment Rate, Average Weekly Earnings, Public Finances
US: Existing Home Sales
EU: GER: ZEW Survey
Final results: Velocity Composites
Interim results: Accrol Group, IG Group
Trading update: Close Brothers, Dixons Carphone, Midwich Group
Wednesday 23 January
UK: CBI Trends Surveys
US: Advance Goods Trade Balance, Building Permits, Business Inventories, Construction Spending, Factory Orders, Housing Starts, Monthly Budget Statement, Net Long-term Treasury Investment Capital Flows, Retail Inventories, Retail Sales Advance, Trade Balance, Mortgage Applications , House Price Index, Richmond Fed Manufacturing Index
EU: Consumer Confidence
Final results: Harwood Wealth Management
Interim results: Joules Group
Quarterly results: Burberry
Trading update: Antofagasta, Brewin Dolphin, Computacenter, Great Portland Estates, Wetherspoon (JD), WH Smith
Thursday 24 January
US: Wholesale Inventories, Initial Jobless Claims, Continuing Claims, Kansas City Fed Manufacturing Activity, Markit Manufacturing PMI, Markit Services PMI, Leading Index,
EU: ECB Rate Decision, Manufacturing PMI, Services PMI; FRA: Manufacturing PMI, Services PMI GER: Manufacturing PMI, Services PMI
Final results: Blue Prism
Interim results: NCC Group
Trading update: CMC Markets, Daily Mail & General Trust, Fever-Tree Drinks, Haynes Publishing Group, ITE Group, Kier Group, Restaurant Group, St James's Place
Friday 25 January
UK: CBI Reported Sales, BBA Loans for House Purchases
US: Durable Goods Orders, Capital Goods Orders, New Home Sales
EU: GER: IFO Business Climate, IFO Expectations
Trading update: Barr (AG)