Review of the week: Skulduggery in the Strait

Iran and the UK clash in the Gulf, squeezing the supply of oil worldwide. Chief investment officer Julian Chillingworth notes that fading global growth should keep the crude price from spiking.

On Tuesday Boris Johnson is expected to be confirmed as Conservative Party leader and ipso facto Prime Minister.

His rival, Foreign Secretary Jeremy Hunt, doesn’t exactly have the time for a last-dash publicity drive to upend the inevitable. The diplomatic tiff between Iran and the UK deepened when Iran grabbed a UK oil tanker from the Gulf of Hormuz, retaliating to the UK detaining an Iranian ship in Gibraltar. As both sides’ crews remain, effectively, hostages, negotiations between the UK and Iran have been fruitless. Neither side wants to back down – Iran because it feels backed into a corner and Mr Hunt because he’s midway through a run for the UK’s top job.

The UK government says it detained the Iranian ship because they believed it was en route to Syria, a regime the EU is blockading. However, rules were changed at the last minute in order to impound the tanker and the timing is fishy enough that Iran believes the real reason was to help the US squeeze Iran by taking away its oil revenue. All of this has underscored the vulnerability of Western oil supply routes in the Gulf, should Iran get grumpy. For now, plans are afoot to create a convoy system to ferry Western-flagged ships through the danger zone. This would curtail the number of vessels making the trip, so the oil price was pushed slightly higher last week. Brent was trading at $64 this morning, but – given expectations of slower global GDP growth – still significantly down from this year’s high of $75 in April.

Europe is one of the worst culprits dragging the chain on growth. The European Central Bank (ECB) has cut its forecast twice over the past year; the eurozone economy is expected to grow at just 1.1% this year, down from 1.9% (both original forecast and 2018 growth). A slew of European PMIs will be released on Wednesday. These surveys are a mixture of confidence gauges and hard order numbers that give helpful insight into how businesses are faring. Suffice to say, economists aren’t expecting much joy from these statistics.

This general gloom for the Eurozone has developed, as is typical of our time, into an argument for the ECB to inject some financial sugar into the ailing economy to pep it up. But with its base deposit interest rate already negative, the bank may have to look once again to a different method of stimulus. In particular, there are calls for the ECB to reignite its programme of buying European bonds (known as quantitative easing or QE). At the moment, the central bank simply reinvests the cash it receives from maturing bonds it already owns back into the market. But there are difficulties here as well. The ECB is sitting on €2.6 trillion (£2.34tn) of bonds, roughly 20% of the eurozone’s GDP. Not only that, but it is getting dangerously close to its holding limit of one-third of any nation’s national debt. If it starts another round of bond purchases, it would probably have to raise this number. Doable, sure, but not exactly a good look. And would it even have any effect?

The central idea of QE is to pull down long-term interest rates, lowering financing costs for businesses and investors and thereby coaxing them to embark on long-term projects that will boost the economy. The traditional central bank tool for adjusting monetary policy is moving short-term interest rates – the rates that banks earn when they leave their reserve cash with the central bank. However, this tends to have little effect on longer-term rates, thus the reason for the invention of quantitative easing. If you start buying up extraordinary amounts of longer-term bonds, you can manipulate the market for long-term lending costs, dragging them lower.

With that in mind, what good can another bout of QE really do if German 10-year government bonds already yield -0.3%, i.e. if investors would rather lose 0.3% a year than take a punt on European business ventures...


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Source: FE Analytics, data sterling total return to 19 July

Fed insurance

Across the Atlantic, the US Federal Reserve (Fed) had to tone down investors’ expectations.

It was so forthright about its intention to cut interest rates in July that some people got ahead of themselves and figured the Fed was going to lop off 0.5% rather than the standard 0.25%. Fed Chair Jay Powell had to come out and rein the market in: the rate is expected to fall from the 2.25%-2.50% range to 2.00%-2.25%.

This cut is widely seen as an ‘insurance’ cut, in response to poor data and slower global growth. We definitely see it that way. There are plenty of risks zipping round the globe and economic data isn’t exactly wonderful, yet none of our gauges of recession are showing danger signals. Stock markets can rise and fall significantly in short periods of time, but they tend to recover relatively quickly in absence of recession. That’s why we focus so intently on the chances of this arising – on a sustained downturn in the global economy.

Earnings season swings into high gear in the UK and US this week, with a whole raft of household names posting their results. In the US, more economic data is due out, capped by the first estimate of America’s second-quarter GDP on Friday. The US will also release household spending data, which is expected to be 4% higher than a year earlier. Disappointment here could lead to a wobble – or it could mean a growing chorus for deeper cuts to the Fed’s interest rates. Especially if US PMIs are poor on Wednesday and goods orders are weak on Thursday.



UK 10-Year yield @ 0.73%
US 10-Year yield @ 2.06%
Germany 10-Year yield @ -0.33%
Italy 10-Year yield @ 1.60%
Spain 10-Year yield @ 0.38%


Economic data and companies reporting for week commencing 22 July


Monday 22 July

US: Chicago Fed National Activity Index

Final results: Tungsten Corporation

Interim results: Sthree

Trading update: Petra Diamonds


Tuesday 23 July

UK: CBI Trends Surveys

US: Existing Home Sales, House Price Index

EU: Consumer Confidence

Final results: Cohort, IG Group, Joules Group, Pz Cussons

Interim results: Gresham, Segro, Unite

Trading update: Paragon Group


Wednesday 24 July

UK: BBA Loans for House Purchases

US: MBA Mortgage Applications, Manufacturing PMI, Services PMI

EU: Manufacturing PMIs, Services PMIs, Money Supply (M3)

Interim results: Croda International, Drax, GlaxoSmithKline, Informa, ITV, Tullow Oil

Quarterly results:

Trading update: Antofagasta, Brewin Dolphin, Britvic, Marstons, Paypoint


Thursday 25 July

UK: CBI Reported Sales

US: Wholesale Inventories, Retail Inventories, Capital Goods Orders, Durable Goods Orders

EU: IFO Business Surveys, ECB Interest Rate Decision, Advance Goods Trade Balance, Initial Jobless Claims, Kansas City Fed Manufacturing Activity

Final results: Diageo, Fuller Smith & Turner, Highlands Natural Resources, NCC

Interim results: Anglo American, AstraZeneca, Capital & Counties, Howden Joinery, National Express, Relx, Unilever

Trading update: AJ Bell, CMC Markets, Compass Group, Daily Mail & General Trust, Intermediate Capital, Sage Group


Friday 26 July

US: National Income and Accounts (Revisions), GDP (Q2), Personal Consumption, Core PCE

Interim results: Foxtons, Greencoat UK Wind, IMI, Rightmove

Trading update: Vodafone


Total votes: 28

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