Review of the week: The hunt for the Holy Grail
“It’s just a flesh wound.”
Like Monty Python’s Black Knight, Prime Minister Theresa May is hopping around Westminster raring for another fight. Last week was an absolute defeat, leaving her authority in tatters and her deal roundly denounced by Parliament. Despite the EU’s steadfast refusal to renegotiate the terms of the compromise deal, Mrs May says she plans to take it before the Commons tomorrow for a third attempt if she can get the numbers. And so she has been cajoling, pressuring, generally winning hearts and minds. She has warned Brexiteers that there won’t be a split at all if they don’t take her deal, warned moderates that there will be a hard Brexit if they don’t take her deal and thrown a bag of money at the DUP. Will that be enough? Only time will tell.
Meanwhile, the US and China’s trade deal is further from inking than many investors had hoped. The two parties are working through intellectual property protections, a major gripe for American firms yet one that China has actually started to fix over the past couple of years. At the weekend, a Chinese newspaper said the deal may not be ready till June. If that is true, markets may get shaky. The global economy has been decelerating, with export-heavy countries getting hit the hardest. The eurozone’s growth forecast was cut almost in half to 1.0% earlier this month and Japan’s economic expansion is likely to be significantly lower as well, at 0.9% for 2019. Both Europe and Japan’s largest trading partners are the US and China, so they are doubly hurt by the stand-off.
It may sound obvious, but policy delays and uncertainties affect the confidence of households and investors. This, in turn, leads to less shopping, fewer widgets coming out of factories and a halt on big, long-term projects, like new factories, offices and business ideas. We hope the wrinkles in the Sino-American trade negotiations can be ironed out soon because – as we’ve seen in the UK – the longer uncertain policy hangs around the more it sucks the energy out of an economy.
As for Brexit Britain, it is fighting as much an internal battle as an external one; the hunt for the Holy Grail is likely to roll on for a good few years yet.
Source: FE Analytics, data sterling total return to 15 March
The Federal Reserve (Fed) meets on Tuesday and Wednesday this week, giving a ray of insight into an important part of equity market valuation.
Last month’s Fed meeting was the catalyst for both the stock market to rally after a poor turn of the year and increased concern about slowing global growth. At the time, global expansion had been pretty good – the stock market had slumped, but few economic measures were causing alarm. The US in particular looked strong. Then the Fed made a massive U-turn, saying it would stop hiking interest rates for the foreseeable and may even cut them in 2019. Many wondered, what data did the Fed have, that everyone else didn’t, would cause it to make such a radical change in its policy?
Of course, the prediction for much lower interest rates than originally expected made the future profits of companies more valuable. That’s because as the return you can get for putting your cash in the bank gets lower, the returns you can make above that level become more attractive. In the trade, it’s called “discounting” when you apply this reasoning to an investment’s future earnings to find how much it’s worth today (what the share price should be).
So the US market is weighing two related yet countervailing things: slower growth is bad for stock markets, especially if it continues to the point of recession; but slower growth means lower interest rates and therefore higher-valued future profits when you work them out today. That’s why markets are hovering just below their September peak – back then, economic growth was looking a bit better, but interest rates were expected to rise much, much faster.
Investors will be hanging on Fed Chair Jay Powell’s every word at the press conference on Wednesday, hoping for a little more of a steer on his committee’s assessment of the globe’s economic health. It’s highly likely that Mr Powell will pick his words so carefully that investors won’t have anything new to go on. But that calm is a little misleading. We believe markets will be erratic, both up and down, as new economic data come out and announcements are made over Brexit and the US. Central bankers are being very careful about what they say to avoid up-ending markets; politicians and statisticians don’t have the same constraints.
UK 10-Year yield @ 1.21%
US 10-Year yield @ 2.59%
Germany 10-Year yield @ 0.08%
Italy 10-Year yield @ 2.49%
Spain 10-Year yield @ 1.19%
Economic data and companies reporting for week commencing 18 March
Monday 18 March
UK: Rightmove House Prices
US: NAHB Housing Market Index
EU: Trade Balance
Final results: Miton Group
Tuesday 19 March
UK: Unemployment Rate, Average Weekly Earnings
US: Factory Orders, Durable Goods Orders
EU: Construction Output, Labour Costs, ZEW Survey
Final results: Antofagasta, Learning Technologies Group, Mortgage Advice Bureau, Mears Group, NAHL Group, TP ICAP, Team17 Group, Wood Group (John)
Interim results: SCS Group, Softcat
Trading update: ASOS, Ocado
Wednesday 20 March
UK: Inflation Rates, House Price Index, CBI Trends Total Orders,
US: MBA Mortgage Applications, Fed Meeting and Interest Rate Decision
Final results: Centaur Media, Curtis Banks Group, Empiric Student Property, Genel Energy, Kingfisher, Ten Entertainment Group
Interim results: Kier Group
Thursday 21 March
UK: Public Finances, Retail Sales, Bank of England Meeting and Interest Rate Decision
US: Philadelphia Fed Business Outlook, Continuing Claims, Leading Index
EU: ECB Economic Bulletin
Final results: Next, Ted Baker
Trading update: Mitie Group
Friday 22 March
US: Manufacturing and Services PMIs, Wholesale Inventories, Existing Home Sales, Monthly Budget Statement
EU: Current Account FRA: Manufacturing and Services PMIs; GER: Manufacturing and Services PMIs
Interim results: Smiths Group