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Gaining ground

Posted on Monday 18th September 2017

The world’s leading index ended at a new high despite a fresh missile test by North Korea, while the Bank of England suggested a rate rise was imminent.

It was a week of big numbers: 2,500 – the S&P 500’s record close on Friday; 3,700 – the flight distance (in kilometres) of the ballistic missile North Korea fired over Japan’s Hokkaido province into the ocean, also on Friday; and 1,512 – the diameter (in feet) of Apple’s new ring-shaped headquarters in California… longer than the Empire State Building is high.

The three were not unrelated. Premature relief came early in the week that North Korea had apparently not gone ahead with its plans to carry out another test, helping the world’s leading index to continue its upward trend. Apple’s launch of the iPhone 8 failed to move markets, because the company was also obliged to announce a delay to the revolutionary iPhone X (and there was even a technical failure at the launch event). A number of the company’s leading suppliers suffered sell-offs, among them the UK’s own Dialog Semiconductor.

Yet despite a mediocre week on the market, Apple’s performance this year has been exhilarating – the world’s largest listed company has risen almost 40%, to the point where it accounts for close to 4% of the S&P 500. (Facebook, Amazon, Apple, Netflix, and Alphabet (Google’s parent) – the FAANGs – now make up more than 12% of the index.) The FAANGs also account for a vastly outsized share of the index’s 2017 growth. Apple investors remain hopeful it won’t be long before the technology giant becomes the first trillion-dollar listed company.

At close last Friday, the S&P 500 completed 3,112 days since its last 20% decline – the technical definition of a bear market. It is currently enjoying the second-longest run in its 94-year history, a run which has seen it gain close to 270% – last week the index rose 1.5%.

On Friday, North Korea duly conducted its missile test, which added to nerves but failed to make a noticeable dent in US stock prices. Indeed, Japan’s own Nikkei 225 shot up 3.3%. Yet market insouciance should not simply be taken to mean that it is business as usual in global geopolitics. Earlier this month Dennis Rodman, the former basketball star, raised eyebrows when he told Good Morning Britain that he wanted to reconcile his friends Donald Trump and Kim Jong-un. Rodman, who once head-butted a referee and declared a few years ago that he was marrying himself, has since 2013 been a regular skiing and karaoke buddy of the North Korean leader – and recently gave him a copy of Donald Trump’s bestselling book, The Art of the Deal. Over the summer, a leading North Korea expert, speaking to Time magazine, said of Rodman: “He’s not the best ambassador… but it’s who we have.”

In such scenarios, market-pricing models only get you so far. As ever in investing, avoiding strong geographical biases helps to provide at least some protection, and all the more so when any of a number of markets might ultimately be impacted. According to Clyde Rossouw of Investec Asset Management, there are two main ways to avoid excessive exposure to country-specific risks: invest in local companies across several different jurisdictions, or invest in companies that themselves operate across several jurisdictions. He takes the second approach.

“Because the business is strong, you hope that the company’s geographical footprint allows them to make money,” says Rossouw. “It’s very rare that we’ve been willing to take on individual country exposures in terms of investing in companies that are solely dependent on one market for their profits. So we don’t have to worry as much about the geopolitical turmoil as we do about whether the businesses are strong and sustainable.”

Seven-year itch

The US, meanwhile, is benefiting from strong economic currents back at home. Figures released last week showed that US incomes rose by 3.2% in 2016; while the number living in poverty fell by 2.5 million, taking it almost down to pre-financial crisis levels. Separate data showed that new job openings reached a record high in July. The country’s economic recovery since the crisis is now the third-longest US recovery on record.

Employees in the UK are also enjoying a jobs boom, with figures showing employment at its highest level since 1975. Yet the improvement was overshadowed by the spectre of inflation, which last week struck a new high of 2.9%. By UK standards, that’s a high number – if it reaches 3%, the governor of the Bank of England has to send a letter to the chancellor of the exchequer explaining the Bank’s failure to hold it down. It is also bad news for wage-earners, since wage inflation remains far behind consumer price inflation.

The Bank of England’s Monetary Policy Committee still voted 7–2 to leave interest rates on hold, but the tenor of its report undoubtedly marked a shift in its outlook. “Some withdrawal of monetary stimulus is likely to be appropriate over the coming months,” it said. Expectations of a rise in November increased as a result, and the pound went up in value, reaching a one-year high against the dollar on Friday and a two-month high against the euro. The FTSE 100 fell 2.2% as a result, while the Eurofirst 300 rose 1.3%.

Aside from earners, the most immediate UK victims of the rise in inflation are those with large cash holdings. Data released by HMRC shows that an increasing number of UK savers are switching out of Cash ISAs, while contributions flowing into Stocks & Shares ISAs have been rising. Although the shift suggests growing awareness of the cost of inflation on cash holdings, Cash ISA subscriptions in the last tax year were still worth £39.2 billion – that’s a lot of money losing its purchasing power.

As wage pressures mounted, Theresa May last week agreed to end the public sector pay cap (of 1%) after its seven-year freeze. The announcement included a 2% annual pay rise for the police, but the Trades Union Congress is set to campaign for an increase of at least 5% for its five million workers. Yet the UK government had greater domestic concerns last week, as a terrorist attack on the London Underground left 29 people injured.

That £350 million

It was a significant week for the UK’s Brexit plans. The prime minister succeeded in getting her EU bill through the House of Commons at the first reading by a majority of 36 votes. The bill shifts 12,000 EU regulations onto the UK statute book; but MPs have proposed 59 pages of amendments, including a request for the UK’s membership of the single market and customs union to be extended.

Despite the initial boost, the prime minister faced some vocal opposition. Conservative MP Dominic Grieve, a former attorney general, described the bill as an “astonishing monstrosity”. Grieve was among the Conservative MPs supporting an amendment to require the final Brexit deal to be approved by parliamentary statute. Alex Norris MP compared that the government’s handling of the Brexit negotiation process to a “bad stag do”. The prime minister may have been more concerned, however, by an article by Boris Johnson published on Friday which argued that the UK should indeed get back its £350 million a week to spend on the NHS – as famously promised on the Vote Leave campaign buses. Sir David Norgrove, head of the UK Statistics Authority, said Johnson was guilty of “a clear misuse of official statistics”.

The government made what looked like a more mollifying gesture to the EU, by committing the UK to contribute to the European Defence Fund after Brexit. The pledge to support European security “unconditionally” marked a change in tone from earlier post-referendum declarations. Moreover, Downing Street announced that Theresa May will deliver a speech in Florence this week to update the EU on the UK’s exit plans. The prime minister’s spokesman said she would “underline the government’s wish for a deep and special partnership with the EU once the UK leaves”.


The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

© S&P Dow Jones LLC 2017; all rights reserved



Loonie tunes

Posted on Tuesday 12th September 2017

Despite continued geopolitical concerns, central bankers stole the limelight, pushing currencies to new records.

The common loon was never meant to appear on Canada’s dollar coin, which in June reached its thirtieth birthday. But when the dies for the new design disappeared en route to the Ottawa mint – perhaps bound for a counterfeiter’s workshop – the expressive diving bird, known for its distinctive cries, was adopted instead.

Last week the ‘loonie’ soared to a two-year high against the US dollar. Although the currency’s value had already benefited from dollar weakness, the proximate cause of last week’s rise lay closer to home – a decision by Canada’s central bank to raise interest rates to 1%. The accompanying central bank report noted the strength of Canada’s economy, but also acknowledged that geopolitics and trade tensions had already provided tailwinds for the currency.

There are, of course, plenty of geopolitical developments and trade tensions to worry about – not to mention colourful rhetoric from some of the key players. Last week, the US ambassador to the UN warned that North Korea was practically “begging for war” with its provocative nuclear tests. At a subsequent meeting of the BRICS countries (Brazil, Russia, India, China, South Africa) in China, Vladimir Putin countered that North Koreans would rather “eat grass” than give up on their missile programme.

If Donald Trump seemed somewhat less forthright on global issues than usual, that may have been because his focus was four-square on Washington, D.C., where he took the surprise decision to agree to a Democrat offer to extend the government debt ceiling to mid-December – apparently without meaningful negotiations and certainly without Republican Congressional approval.

With the exception of Japan’s Nikkei 225, which dipped 2.1%, leading global stock indices were relatively unresponsive to the week’s events – the S&P 500 dropped 0.51% over the five-day period. Indeed, investors were far more interested in the gnomic pronouncements of the world’s leading central bankers. Rates globally may only just be emerging from historic lows – 5,000-year lows, according to the Chief Economist at the Bank of England. But while markets responded positively to Canada’s rate rise, their primary focus was not rates but quantitative easing – especially in the eurozone.

Cruising speed

Speaking at an ECB press conference on Thursday, Mario Draghi announced that the bank will next month publish its plans to scale back quantitative easing. It’s been a long wait – and the ECB has trillions of euros worth of bonds to offload – but the ride ahead is at least expected to be calmly piloted. In its notes, the bank highlighted the upturn in growth in the eurozone, an upturn that has been one of the global economic highlights of 2017. The ECB forecasts inflation at 2.2% this year, although believes it will fall back to 1.2% next year. The euro rose in the wake of the comments, although European stocks suffered somewhat as a result. The Eurofirst 300 ended the week down 0.17%.

Frankfurt, home to the ECB, is already enjoying supportive tailwinds from elsewhere, if the words of John Cryan are anything to go by. Last week, the CEO of Deutsche Bank expressed surprise that anyone was still asking which EU city would benefit most from those financial services businesses that choose to shift jobs out of London. “The race has already been won before it even began,” said Cryan. He listed market infrastructure and breadth, taxes and regulation as key issues a city needed to have right in order to attract the top companies in the sector: “there is only one European city that can fulfil the requirements,” he said. The head of the Deutsche Börse agreed, saying that Frankfurt would be the “massive winner”. In fact, the larger question may yet be over the scale of any exodus, given London’s multiple advantages as a financial services hub.

While global politics and Hurricane Irma held the headlines, the first televised debate ahead of the German election sat firmly at the other end of the spectrum: calm, well-mannered, and nuanced. On many areas, Angela Merkel and Martin Schulz appeared to disagree very little. After the excitement of the Brexit referendum and the US and French elections, Germany’s federal elections later this month should not trouble the box office too much – even if Schulz pulls off a surprise victory.

Hot air?

Not so Brexit negotiations, which continue to offer plenty of snappy soundbites, loud public criticisms and general headline fodder, but only limited signs of progress. The leaking last week of a Home Office document outlining the UK’s post-exit approach to immigration proposed a far tougher system than had been anticipated. The report introduced a ‘Britain first’ policy that would prioritise training UK workers and dial down the access rights of EU workers to be little different from those of non-EU workers. For skilled workers, however, changes were pretty minimal – immigration could probably continue relatively unchanged. It remains to be seen whether the leak was made in order to register the level of opposition before offering a watered-down version.

Agriculture and hospitality are possible casualties of the outlined approach. The British Hospitality Association last week warned that the paper’s provisions could prove “catastrophic”, while the British Farmers Union complained they would cause “massive disruption to the food supply chain”.

Those MPs who favour a hard Brexit could feel a little more wind in their sails last week; reports said many were regrouping in parliament to oppose the emerging government position on Brexit – in order to harden it. John Redwood, a veteran of financial markets and veteran Eurosceptic, said that the UK need not fear operating under World Trade Organisation rules – the default arrangement should a deal between the UK and EU not be reached before the deadline.

The possibility of a no-deal scenario certainly appears to be rising. The cross-Channel spat continued last week, stoked by the apparent impasse reached over the divorce bill. Theresa May expressed a desire to now fast-track talks by negotiating day-in day-out, but Michel Barnier said that such an approach was unrealistic. The initial timetable – under which exit talks were slated for October – looks increasingly likely to be delayed. Barnier accused the UK of “backtracking on its commitments.”

Beyond the fallout, indicators suggested the UK economy had been slipping – but may now be gaining altitude. UK construction growth came in at a disappointing level early in the week, while service sector growth struck an 11-month low, and exports to non-EU countries fell (while exports to the EU rose). Yet on Friday, manufacturing data came in strongly and the broader economy recorded a pick-up in growth in the three months to August, as the economy expanded 0.4%. The FTSE 100, however, fell 0.73% over the five-day period, as a falling copper price hurt mining companies.

Despite the continued Anglo-EU spat, much of the focus in parliament last week was on the second round of the Finance Bill. When Theresa May called a snap election earlier this year, a number of policy reforms were dropped from the bill, in order to facilitate its rapid passage through the Commons ahead of the election. Last week the government published its second instalment.

A reduction in the time period before which non-domiciled UK residents become deemed domicile was one of the reforms that the government had put on ice. But last week it confirmed the measure, shifting the threshold from 17 to 15 of the last 20 tax years.  A pledge to ban cold calling – as part of a crackdown on pension scams – was again deferred. But the bill confirmed the cut in the tax-free dividend allowance from £5,000 to £2,000 – to be implemented from April 2018; a measure that reinforces the importance of making full use of tax-advantaged opportunities such as ISAs. It also confirmed the cut in the money purchase annual allowance from £10,000 to £4,000, effective from April 2017, which limits the amount that can be invested in a pension by those who have already taken benefits. The government has faced some criticism over its quick-fire changes to policy, which can all too easily hamper financial planning. In such circumstances, avoiding the pitfalls becomes harder – understanding your options and seeking out good advice is a sensible place to start.


The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

© S&P Dow Jones LLC 2017; all rights reserved



Summer saga

Posted on Monday 4th September 2017

Despite rocky moments in politics and on markets, US and UK stocks ended August in the black, as global economic momentum persisted.

It was not a quiet and sunny month on markets. The August performance of the S&P 500 and FTSE 100, leading indices for the US and UK respectively, looks decidedly alpine, with peaks and valleys that in many cases reflected a high level of sensitivity to global politics. The VIX, which measures S&P 500 volatility, recorded two significant spikes in August, doubling the number seen so far this year.

Despite the craggy trajectory, however, the S&P 500 ended the month in the black, buoyed by an odd pair: technology and utility stocks. It finished last week up 1.4%, as healthcare and technology stocks both enjoyed strong weeks and as revised GDP data showed that the economy had grown faster than expected in the second quarter. Concerns over Hurricane Harvey persisted, while the saga of North Korea’s nuclear programme became more dangerous than ever at the weekend, as the hermit state conducted a weapons test of what it claimed was a hydrogen bomb. The test generated an earthquake with a magnitude of 6.3 and drew strong criticisms from the US, Russia and China.

More direct US economic concerns also made themselves felt last week, in the form of disappointing jobs and wages figures in the monthly payroll report – a publication that had been delivering largely good news in previous months. Employment figures rose by 156,000 in August, against a forecast of 180,000, potentially denting the Fed’s growing hawkishness over interest rates.

Government funding is also a growing concern, as the perennial need to raise the US debt ceiling approaches – and requires a Congressional vote. Last week, leading credit agencies voiced their own concerns. S&P Global warned that failure to raise the ceiling in time would probably be “more catastrophic” than Lehman’s fall in 2008, while Fitch Ratings said that such a failure would lead the agency to downgrade US debt from its current AAA rating.

Meanwhile, business leaders in both the US and Mexico began to look at legal options to defend the status quo should Donald Trump follow through on threats to bring to an end the North American Free Trade Agreement (NAFTA), a trade agreement between the US, Canada and Mexico that has been in place for 23 years.

What protectionism?

Whether the president chooses (or is able) to follow through on such plans remains to be seen. Yet there is no uncertainty over the current trade momentum at America’s ports. Six of the nine largest US ports have broken monthly traffic records in the past year – and August was the busiest month on record. The rise was seen in both imports and exports, which enjoyed a combined year-on-year rise of 6% in the first half of 2017.

In part, this may reflect the growing willingness of consumers and companies alike to spend money. The summer earnings season in the US pointed to supportive tailwinds in the corporate sector, while the weaker dollar may be helping US exporters.

The US is buoyed by global trends too. Indicators for each of its five largest trading partners – the EU, China, Canada, Mexico and Japan – have offered reasons for confidence in recent months. Canada recently struck its highest growth rate in six years, while the US’s other NAFTA partner, Mexico, has just seen its growth forecast upgraded by its central bank.

In China last week, manufacturing surveys showed confidence in the sector rising, with one leading survey striking a six-month high. In Japan, where growth (if not yet inflation) has recently found new momentum, labour shortages last week fell to a 43-year low, with an average 1.52 applicants per job advertised. The Nikkei 225 ended the week up 1.2%, helped in part by a falling yen.

Unity pitch

The US’s largest trading partner, the European Union, enjoyed perhaps the strongest week of the lot, as consumer confidence rose to its highest level since July 2007 – before the global financial crisis. The growing bullishness was felt across a range of sectors, as both industry and services showed signs of momentum. Italy’s official economic confidence measure struck a ten-year high, and Germany’s Ifo Business Climate Index set a new record. Moody’s has upgraded its forecasts for European growth.

Moreover, there were encouraging political signs for Emmanuel Macron, the French president, despite a sharp decline in popularity since he took office. Among his more contentious policy proposals is his labour reform plan, but last week unions provided unusually muted opposition to the president’s offer of further detail. The plans include a number of measures designed to increase corporate confidence and investment: capping the damages that courts can make employers pay for wrongful dismissal; allowing businesses with fewer than 50 workers to negotiate deals with employees directly; and permitting larger companies to make isolated agreements with unions – and even sometimes organise employee referendums.

Such plans play well to German ears, which is just as well for Angela Merkel, as last week the German chancellor finally came off the fence – or at least edged a little to the side – over the French president’s call for a common eurozone budget. Merkel said she now favoured a “small” common budget, with a regional finance minister to steer economic terms. The chancellor is known for her caution – thus the introduction to the German language of ‘merkeln’ (meaning, roughly, ‘to dither’). Yet she also has a strong standing in the polls ahead of this September’s federal elections, and may be keen to capitalise on the current Franco–German momentum while it lasts. The Eurofirst 300 ended the week up 0.55%, aided by corporate earnings, but the euro remains historically strong against both the dollar and the pound.

Cooling on cash

The EU is having less success in the latest round of Brexit negotiations, which continued last week. David Davis and Michel Barnier could barely contain their frustration with one another in a joint press conference. As it happened, there had been some progress on frontier workers’ rights and the UK–Ireland common travel area, but not on the larger matters of the UK’s exit bill; judicial supervision for the new agreement; and the contours of the broader negotiating process that lies ahead. Barnier said “no decisive progress” had been made while Davis said that the EU needed to show greater “creativity” in its approach.

Meanwhile, on a visit to Japan the prime minister announced her plan to stand for re-election in 2022, apparently blindsiding many in her own party. There were encouraging signs back at home for Theresa May, as UK manufacturing sentiment struck a four-month high, suggesting growing momentum for the sector. The FTSE 100 ended the five-day period up 0.5%, its gains largely eked out by energy companies.

Figures released last week by HMRC suggest that an increasing number of UK savers are turning to equity markets in the search for better returns, at the expense of low-paying cash alternatives. Subscriptions to Cash ISAs fell by a third in the last tax year – down nearly £20 billion. In contrast, a rise in Stocks & Shares ISA subscriptions means that the amount invested in Stocks & Shares ISAs has overtaken the total value of Cash ISA savings for the first time.

The new personal savings allowance is one factor contributing to this trend, but low interest rates continue to frustrate savers. Data released this summer by Moneyfacts revealed that the average no-notice Cash ISA rate has fallen by a third in the last year, to just 0.61%. Of 1,721 savings products on the market, none offers a rate that beats inflation. It is sobering to consider that more than £1,585 billion is held in retail savings accounts (according to the Bank of England) – all of it is losing money in real terms. Moreover, a BBC survey published early this week shows that most economists do not expect UK interest rates to rise until 2019. Those still relying on cash for long-term savings needs continue to face a mountainous challenge.


The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

© S&P Dow Jones LLC 2017; all rights reserved

Division Bell

Posted on Tuesday 29th August 2017

As the US president confronted perceived enemies at home and abroad, the annual meeting of the world’s central bankers delivered some balm for markets.

On Saturday, Floyd Mayweather and Conor McGregor met in Las Vegas, Nevada for the highest-grossing bout in history. The boxing match was, perhaps, a fitting close for a week in which political conflict and disagreement was to the fore, especially in the US.

A few days earlier, in the neighbouring state of Arizona, Donald Trump returned to the stump for a speech to his support base – and was no less pugnacious than he had been on the campaign trail. The president attacked several leading media outlets and Republicans in his address. He went on to say that, even if the government was shut down, he would make sure sure that the Mexican border wall was built. He also commented on prospects for the North America Free Trade Agreement (NAFTA) between the US, Canada and Mexico, saying that the US would “end up probably terminating NAFTA at some point, OK? Probably.”

A ‘shutdown of government' is supposedly risked every time the perennial need for the US Congress to vote for a rise in the federal debt ceiling arises. The president needs Congress to vote through a rise before mid-October.

The Trump administration did not shy away from conflicts on the international stage either, imposing sanctions on a range of Chinese and Russian companies that it accuses of facilitating North Korea’s nuclear weapons programme. The decision came despite the recent departure from the White House of Steve Bannon, the hawkish alt-right advisor who said, in his most recent interview, that the US is in an “economic war” with China. Meanwhile, Donald Trump committed thousands more troops to Afghanistan, signalling a more interventionist stance than he had taken on the campaign trail. Most momentously of all, North Korea launched a missile test over Japan into the North Pacific, pushing regional tensions to a new high.

Investors are certainly taking note. Last week Ray Dalio, head of the world’s largest hedge fund, Bridgewater, signalled that politics (most especially in the US) was pushing him into a more defensive position. “I believe that… politics will probably play a greater role in affecting markets than we have experienced any time before in our lifetimes.”

Yet many investors and Republicans alike still hold out hope for Trump’s promised programme of tax cuts, and last week White House officials made clear that these were currently a top priority – Gary Cohn said the administration planned to push the cuts through by the end of the year. Since disbanding his White House business councils, the president is keen to regain momentum – and markets may well be in ‘wait and see’ mode. The S&P 500 rose 0.5% last week, but still clocked its worst month of the year. Nevertheless, corporate earnings and a cheap dollar may have helped to prevent the president’s legislative failures from making a larger dent in stock prices.

Boxed in

Between the time of the president’s speech in Arizona and the bout in Nevada a few days later, the focus turned to Wyoming, where the annual gathering of central bankers was underway in Jackson Hole. The star attractions were, of course, Janet Yellen and Mario Draghi, although Draghi’s words were perhaps more keenly anticipated on markets, as Yellen has already indicated that the Fed will continue to creep out of quantitative easing (QE). The governor of the European Central Bank, on the other hand, holds more QE assets and, aside of a 25% cut to monthly purchases announced back in April, has yet to turn decisively in a post-QE direction.

Like his counterparts in the US, UK and Japan, Mario Draghi is somewhat boxed in. On the one hand, growth and employment trends appear ill-matched to the current easy monetary regime. On the other, inflation remains subdued – except in asset prices, of course. The scale of QE means that the withdrawal of central bank support could cause ructions on financial markets, if poorly managed. Like the Bank of Japan, the ECB is continuing its programme for the moment, but the ECB faces a fresh challenge next year: a shortage of (permissible) assets to buy. It cannot afford to wait too long.

In the event, Draghi gave little away on either rates or QE, thereby giving the impression that nothing too momentous is in the pipeline. He also refused to talk down the single currency (despite widely known ECB concerns about its strength) as the euro hit its highest level against the dollar since January 2015. Indeed, his key message concerned not rates and easing but trade and regulations, and was thought to be aimed at the US administration. “Any reversal [of post-crisis regulation] would call into question whether the lessons of the crisis have indeed been learnt,” he said. Janet Yellen was similarly forthright. The Wyoming meeting was reckoned to help global stocks, especially in Asia. The Nikkei 225 ended the week up 0.09%.

Torkard giant

In London, the first day of the working week was marked by a landmark bong, as Big Ben (supposedly named after the boxer Ben Caunt, the ‘Torkard Giant’) let out its last regular chime for at least four years, while it undergoes repair work. The bell will continue to chime for New Year’s Eve and Remembrance Day.

There were also suggestions that it should chime for Brexit in 2019. Last week, David Davis proposed a “new and unique” court to supervise EU–UK relations post-Brexit, broadly modelled on the European Free Trade Association system. The UK’s first proposal on the new judicial regime is part of a bid to ensure that talks can move on to the future of the EU–UK relationship this autumn – so too, perhaps, was an acknowledgement by the foreign secretary that the UK will have to pay an exit bill, after all.

The Labour Party took a significant step by declaring itself in favour of the UK remaining a member of the single market for a transitional period, thereby setting out clear parliamentary battle lines. As the third round of Brexit talks opened this week, Michel Barnier warned that the UK was wasting time by trying to ignore divorce issues like the financial settlement. “To be honest, I am concerned,” said Barnier. “Time passes quickly… We must start negotiating seriously.”

Meanwhile, UK employers urged the government to provide clarity on the status of EU nationals post-Brexit as new data showed migration falling to its lowest level in three years following last year’s referendum. Net migration to the UK reached 246,000 in the first three months of the year, down by around a quarter from the previous year – more than half the drop was caused by a dip in the net number of EU nationals in the country. The immigration minister welcomed the fall, while the Confederation of British Industry and Institute of Directors expressed concern.

Reports on investment and corporate profits published last week made for sober reading. The first showed that business investment in the UK has remained flat since the referendum, having increased from 2009 to the second quarter of 2016. The second report predicted that company profits would fall by more than half in 2018. Meanwhile, a report by Countrywide said that house prices would rise by 1.5% in 2017, down from 5% last year.

Older homeowners may have reasons to focus their worry elsewhere, however. A report released last week showed that family disputes over inheritance spiked 36% in 2016, based on the number of cases brought to the High Court. The report highlighted a range of factors at play: more potential claimants for each estate, outdated intestacy laws, and the rapid rise in house prices in recent years in many parts of the country. The merits of careful planning, expert advice and regular reviews cannot be overstated.

Champion currency

UK stocks performed well over the course of the week, buoyed by a rising oil price as well as by a weak currency: the FTSE 100 rose 1.1%. The euro continued its recent climb against sterling, striking an eight-year high and, at almost 93 pence, bringing it another step closer to parity. In part, the shift reflected continued confidence in the eurozone economy. The composite Purchasing Managers’ Index for manufacturing and services edged up still further, continuing its extended high. The improvement largely came from the eurozone’s manufacturing sector, which has performed well despite the rise in the currency. The Eurofirst 300 rose 0.07%.


The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

© S&P Dow Jones LLC 2017; all rights reserved

Distant horizons

Posted on Monday 21st August 2017

In a week marred by violence on both sides of the Atlantic, positive indicators in leading economies could not prevent markets delivering a mixed performance.

“The future influences the present just as much as the past,” said Friedrich Nietzsche – an insight that could surely be applied to markets.

Events in the US last week certainly led investors to feel more cautious about the future – and to adjust positions accordingly. Donald Trump blamed both sides after a white nationalist demonstration in Charlottesville turned violent and, ultimately, deadly. In doing so, he alienated both leading Republicans and several senior business figures. A number of the latter quickly announced their departure from two White House business panels – the Manufacturing Council and the Strategy & Policy Forum. The departures led the president to disband the committees altogether.

The decision presumably means that big business will not enjoy the president’s ear as much as it had. Yet even with the councils in place, he still had a long way to go before ratifying corporate tax cuts or deregulating the financial sector as pledged – hopes for those reforms had contributed to the so-called ‘Trump rally’ that followed the president’s successful election campaign last autumn.

It came as no surprise, therefore, when US stocks dipped in the second half of the week. The departure of Steve Bannon, Donald Trump’s chief strategist, from the White House, prompted cheers on the trading floor of the New York Stock Exchange, and helped shave one-week losses on the S&P 500 to just 0.27%.

Yet even discounting Bannon’s departure, it might seem surprising that stocks didn’t dip further. Consider the fact that the S&P 500 undergoes a daily 5% dip several times over the course of a typical trading year – and yet this year you can count even its 1%-plus single-day declines on the fingers of one hand. Neither an escalation in nuclear rhetoric between Washington and Pyongyang, nor the president’s equivocation over neo-Nazi demonstrations in the US, has meaningfully moved the dial. Volatility on the US’s main index did spike late in the week, but still remained comfortably below its long-term average.

Yet amid the apparent political madness there may be method in investors’ muted response – and in their focus on more distant horizons. After all, forecasting how the Charlottesville tragedy and its aftermath will affect corporate earnings is tantamount to soothsaying, while the demise of two business councils doesn’t mean the president has to change his tax plans. It is easy to overreact to events in the short term – and often much harder to quickly reverse any losses that result.

Moreover, the conduit for investor caution this year has probably been the dollar above all – the greenback has slid almost 9% against a basket of six leading currencies in 2017. That may have acted as a boon to many US companies, particularly those reliant on exports. Moreover, US consumer sentiment last week struck its highest level since January.

Easing easing

The Federal Reserve certainly appears to view the broader US economy in a favourable light, if the latest committee minutes (released last week) are anything to go by. Central bank officials now believe that it can begin to reduce its highly-extended balance sheet “relatively soon”, although members remain concerned at persistently low inflation. The other leading indicator the Fed is mandated to respond to – unemployment – has pointed to a rate rise for some time.

Winding down quantitative easing (QE) is an enormous job. Six major central banks worldwide pursued QE in earnest after the crisis, and today it is the ECB that holds the most assets, followed by the Bank of Japan (BoJ). Between the six of them, the banks hold more than $15 trillion in assets, with almost two thirds of it in government bonds.

In fact, both the ECB and BoJ were last week supplied with further reasons to taper their holdings, should they so desire. Japan clocked its sixth consecutive quarter of growth, the country’s longest unbroken stretch in more than a decade. Its economy grew 1% in the second quarter, a remarkable rate of outperformance of expectations. The latest indicators suggest the third quarter is on a good track too, with private consumption levels a particular highlight. The buoyant figures may yet give the prime minister some of the momentum he needs to push on with his reform agenda. The Nikkei 225 fell 1.3% last week, suffering in part from a strong yen and weak dollar.

Across the eurozone, impressive growth numbers for the second quarter offered cause for confidence. German GDP actually slowed marginally in the second quarter, but still came in at 0.6%, meaning it achieved its best annualised rate since 2014. France grew by 0.5%, while Spain surged by 0.9%, and the Netherlands rocketed 1.5% – a stellar rate for a developed market. Moreover, the countries most afflicted by the global financial crisis are showing healthy recovery signs too. Ireland is a particular highlight, and is currently growing 6.6% year-on-year, while its sovereign debt yield is close to that of France. The second quarter of 2017 was the 17thconsecutive quarter of eurozone growth. The ECB can always give the excuse of low inflation for sitting on its hands, although it also expressed concern over the strength of the euro – and how QE withdrawal might add momentum to the trend.

Yet gains on European markets last week were pared back following a vicious terrorist attack in Barcelona on Thursday which killed 14 people and injured at least 100. The Spanish prime minister identified the incident as a jihadist attack. The Eurofirst 300 ended the week up 0.48%, as leisure and travel stocks suffered on Friday.

Waiting game

If indicators in the UK were less robust, they were encouraging all the same. Inflation defied expectations by remaining unchanged at 2.6% in July, held down in part by falling fuel prices. In its latest report, the Bank of England said that it expected inflation to climb to 3% in October – another blow for cash savers. The FTSE 100 rose just 0.19%.

The UK’s relationship with Europe continued to loom large over the course of the week. Paul Jenkins QC, former head of the government’s legal services, mocked the prime minister’s assertion that the UK could break free of European laws while still enjoying the benefits of the single market, saying it was “foolish” and that keeping close links to the customs union and single market will mean keeping to EU law “in all but name”. Meanwhile, a report published by Economists for Free Trade, a group of pro-Brexit economists, argued that removing all tariff barriers would help to generate £135 billion extra per year for the UK economy. On markets, the pound struck a ten-month low as an imminent rate rise looked increasingly unlikely, but UK wage growth showed up better than expected last week, rising 2.1% in July, while unemployment fell to a new low of just 4.4% (although productivity also fell slightly).

Meanwhile, UK pension policy received renewed scrutiny last week as the chief executive of Royal London warned that, while drawdown and individual pension sales had risen markedly this year, too many retirees were forgoing professional advice. Given the sums involved, and their importance to managing retirement, this is a high-risk strategy.

“We are… concerned that some providers may be ‘sleepwalking’ their existing non-advised pension customers into their own in-house drawdown offerings, repeating some of the poor practice seen in the historic annuity market,” said Phil Loney, chief executive at Royal London.

Finally, the UK government published rudimentary plans to retain current customs arrangements for a transitional period after the UK’s formal exit from the EU. David Davis hopes that the EU will allow the UK to continue to operate under the EU customs umbrella while also negotiating new trade deals – those deals would then be implemented once the UK left the customs union. It remains to be seen whether the EU is now open to what senior officials had previously dubbed a “having your cake and eating it” impossibility.


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