Market Bulletin - Following wind
Financial tailwinds offered Philip Hammond a boost ahead of this week’s Budget while, in the US, Janet Yellen’s words stoked interest rate rise expectations.
In many ways, Philip Hammond will have the wind at his heels as he announces his first Budget in Parliament this week. Stronger tax receipts and positive economic growth mean he can look forward to detailing a £29 billion windfall, according to Resolution Foundation figures released last week – not that he is expected to spend it. Public borrowing should fall to around £56 billion in the current financial year, the report said, down from £71.7 billion in the previous fiscal year and £12 billion lower than the Office for Budget Responsibility’s November forecast.
There are corporate tailwinds to point to as well, not least the upbeat assessments made last week by both BP and Shell, two of the UK’s biggest companies; BP said it was raising its growth forecast and Shell announced it would press on with an offshore investment in the Gulf of Mexico. Aberdeen Asset Management and Standard Life finalised their £11 billion deal to create the UK’s largest independent fund company. Chris Ralph, CIO at St. James’s Place, said there was “a complementary nature to putting the organisations together”, since active fund companies needed to join forces “in a world where the share of passive assets is growing”. The FTSE 100 ended the week up 1.8%.
‘Spreadsheet Phil’, as the chancellor has become known, could even chalk up a populist win by celebrating the decision of Sir Philip Green, announced last week, to pay £363 million to BHS’s insolvent pension fund after months of pressure and negotiations, not to mention a good deal of parliamentary scrutiny and criticism. Add to this the apparent deterioration in the fortunes of Labour and UKIP, both of which have performed poorly in by-elections this year, and he could perhaps be forgiven some swagger, if that had been his style.
Yet if the traditional political bogeymen of recession and a resurgent opposition remain absent, last week’s events suggest the Chancellor still faces weighty external challenges. The head of the CBI criticised the government for an industrial strategy it said was lacking “clear actions and milestones”, while Nissan said that the UK would need to invest £100 million to attract component suppliers, and that the future of its Sunderland plant was not otherwise secure. The announcement that the French company PSA, owner of Peugeot, will acquire Vauxhall from GM for £1.9 billion added to concerns over UK auto jobs.
Moreover, plans for Brexit created political tensions. The House of Lords voted by a majority of 102 to add an amendment to the government’s Brexit bill protecting the rights of EU citizens in the UK, and Theresa May stridently ruled out more powers being surrendered to Edinburgh, pushing up odds on a second independence referendum.
Data released last week by the Bank of England showed that foreign investors (who own around a quarter of the UK bond markets) sold UK gilts at the fastest rate in almost three years in January. Meanwhile PwC, mostly in the news for its unorthodox recent contribution to the Oscars ceremony, released a report warning that London’s 1.8 million full-time migrant workers contribute £46,000 each to London’s economy annually and make up 13% of the workforce – every ten migrant workers support another four jobs in the wider economy. Finally, it was reported that an EU document showed that ‘equivalence’, a priority for the City in Brexit, will be hard to achieve and subject to ongoing review.
Yet immediate issues may be more likely to give the chancellor sleepless nights. Home ownership in England has struck a 30-year low, according to the English Housing Survey. Business indicators suggest economic growth is slowing slightly – Markit Purchasing Managers’ Indices saw levels slip in February, helping sterling to a seven-week low against the dollar. Construction indicators also slipped. Several leading companies, advertising giant WPP among them, warned that inflation was beginning to pick up due to the cheaper currency.
As the purchasing power of sterling declines, and interest rates remain low, it is cash savers who are feeling the pressure most of all. The latest figures from Moneyfacts show that only 23 out of 697 cash accounts offer rates that match or beat inflation – and they are all fixed-rate bonds. There are currently no Cash ISAs which even offer to protect the purchasing power of subscribers’ money, let alone increase it.
Despite these troubles, and disappointing results announcements last week from Cobham and Capita, UK-listed stocks had a good week, in part reflecting the improving fortunes of the energy and financial sectors, both of which loom large on the index; but it was also the result of ripples from across the Atlantic, as the leading four indices in the US all struck intraday highs over the course of the week. The S&P 500 rose 0.54%.
Speech to Congress
The apparent cause was Donald Trump’s first speech to the two houses of Congress. Given his history of provocation and rabble-rousing on the campaign trail and on Twitter, he had set a low bar for success, and the consensus appeared to be that he did indeed clear it. Mentions of his $1 trillion infrastructure investment programme and tax cuts undoubtedly helped sentiment, as did good February figures for US service sector activity. Meanwhile, Janet Yellen’s comments on Friday were widely viewed as hawkish – a March rate rise is now heavily priced in.
Last week also saw the IPO of Snap, owner of Snapchat. The social media company’s value quickly soared to $30 billion on its public debut, despite an unusually protective share structure and 2016 losses of $515 million – one reason could be the current paucity of tech listings. Not all key players in the market appear to be tapping into the apparent Trump boom, however. Figures released by the Federal Reserve showed that US banks have in fact been lending less since the US election last November. Totals fells in December and January, the first two-month dip in five years; even as the reverse appears to be true in Europe, where lending to households and companies rose 2% in December. Despite the US data, bank stocks performed strongly last week, helped by expectations of interest rate rises.
As banks lend more, eurozone inflation is also rising, and reached 2% in February, up from 1.8%. This places it technically above the ECB target, which ordinarily signals a tightening cycle. Mario Draghi, the bank’s governor, may now face pressure to cease his dovish talk. Food and fuel were the leading culprits. Core inflation (which strips both elements out) only came in at 0.9%, but the headline number is supposed to be the ECB’s primary target.
Meanwhile, markets in Europe appeared to be calming slightly ahead of election season, helped in great part by Emmanuel Macron’s rise in the polls for the French presidential election, just as his two leading opponents, Marine Le Pen and François Fillon, face court cases over corruption charges. The yield on 10-year French government bonds dropped to its lowest level in a month. The next few days will be the final full week of electioneering in the Netherlands, where far-right candidate Geert Wilders is expected to come first, but not to become prime minister, due to a lack of willing potential coalition partners. Meanwhile, the Markit Purchasing Managers’ Index (PMI) for the eurozone showed business conditions at their best versus the UK in almost six years. The Eurofirst 300 ended the week up 1.5%.
Aberdeen Asset Management is a fund manager for St. James’s Place.
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