Market Bulletin - Sterling work
Currencies, central banks and politics all exerted their pull on markets last week, as corporate earnings season began.
‘You either love it or you hate it,’ goes the Marmite advert. Last week Tesco apparently chose to do the latter, temporarily ending web-based sales following a price dispute with its supplier, Unilever. The dispute (dubbed ‘Marmageddon’) was merely the proximate cause – behind it lay a recent drop in the pound, which, in sterling terms, had pushed up the price of the imported packaging, raw materials and machinery used in producing jars of Marmite.
Bank of England figures published last week showed that sterling has fallen (on a trade-weighted basis) to the lowest level since records began 168 years ago. In a separate development, the pound received a scaling back within the IMF’s basket of reserve currencies. The Chinese yuan also slipped last week, but as of this month it is the fifth global currency to be included in the basket – sterling was the primary loser, as its weighting dropped from 11% to 9%.
At the end of the week Mark Carney, governor of the Bank of England, told an audience in Nottingham that the Bank was happy to tolerate inflation above its usual 2% ceiling, saying that doing so would help to protect against a sharp rise in unemployment. There was a sell-off in 30-year government bonds last week, underlining that markets expect UK inflation to rise too. The yield on 10-year gilts hit its highest level since June.
In his speech, Carney also warned that food prices were likely to rise. The warning highlights the knock-on effects of the cheaper pound, which continue to be discussed. The FTSE 100 slipped 0.4% last week but remains far above its pre-referendum level. In fact, on Tuesday last week, it reached an intraday high of 7,129 points. Companies that generate most of their revenues from outside the UK have benefited enormously from the pound’s slide, as have UK-based exporters. The earnings of Unilever, supplier of Marmite, were last week forecast to rise by 24% over the coming 12 months – those of fellow Anglo-Dutch multinational Royal Dutch Shell by 132%. But shortly after the ‘flash crash’ of a little over a week ago, Sports Direct issued a profit warning, having lost £15 million from the drop in sterling.
Brexit politics continued to rumble, throwing up comments and possibilities that might once have filled the front pages – but are now too numerous to merit special coverage. Last week divisions in the Conservative Party were on full display, as Europhile MPs spoke out in the Commons against the government’s recent rhetorical shift towards a ‘hard Brexit’. At the SNP conference in Glasgow, meanwhile, Nicola Sturgeon announced a new Scottish independence referendum bill. Polls suggest she has some way to go before she can be confident of winning it.
Theresa May did not merely face enemies within, however. The European Infrastructure Bank announced that it would be winding down cheap loans to UK construction companies ahead of Brexit. Donald Tusk, president of the European Council, reacting to recent rhetoric from May and her ministers, said that “the only real alternative to a ‘hard Brexit’ is ‘no Brexit’.”
French finance minister Michel Sapin told press that US investment banks had informed him they were already formulating their own plans for leaving London. Russian bank VTB went one further, making its own announcement that it would move its investment banking headquarters out of London. “We did have bigger plans for the London office, but after Brexit we are scaling them down and building them up elsewhere,” said Herbert Moos, deputy chairman. “Our board will decide where by the end of the year.” Yet it is notable that, for the moment at least, VTB is the only major bank to have publicly played the exit card.
Despite the inevitable focus on Brexit, domestic financial concerns were increasingly on the radar last week, as speculation intensified ahead of the Chancellor’s Autumn Statement, due on 23 November. While the government has already committed to maintaining the ‘triple lock’ on the basic state pension, it has again hinted at plans to reform pension tax relief, favouring younger and lower earners. Should the government proceed, then higher earners might want to maximise their use of the current tax relief regime before reforms are implemented.
“Given the emphasis that the new prime minister has placed on assisting working people then we need to be really clear that there needs to be some serious examination about how we can rebalance incentives towards the lower-income strata of our society,” said John Glen MP, Parliamentary Private Secretary to the Chancellor. “There is a massive advantage to incentivising young people because the pressures on expenditure for them are much higher. So therefore to create an incentive that is significant…is clearly a very good policy driver.”
Moreover, there was speculation that the Chancellor may choose to ditch the rule that gradually reduces the amount that high earners can save into their pension. If Philip Hammond does go ahead with this reform, it would restore a degree of simplicity to the Annual Allowance, which is widely criticised for being tricky – if not impossible – for those with significant earnings to calculate.
Tricks of the trade
The S&P 500 slipped 0.9% over the trading week, as investors worried that the Fed might indeed raise rates in December. Markets also worried that a sharp fall in Chinese exports in September – down 10% from a year ago - showed signs of slowing growth, although such concerns were assuaged to a degree by news on Friday that China had climbed out of producer price deflation for the first time since January 2012. A further easing of deflationary pressure is expected over the coming months.
If China was worried at Donald Trump’s campaign promise to slap a 45% tariff on Chinese imports (larger even than the 35% tariff he promised to impose on Mexican imports), it could breathe a little easier last week. A recording of Trump making sexist comments (and the further accusations that followed) led several Republicans to distance themselves from their Party’s candidate, including Paul Ryan, the most Senior Republican in Congress.
A very different kind of trade arrangement appeared to be on the cards last week after Vladimir Putin confirmed that Russia would like to agree oil production caps with OPEC. Brent crude rallied in response, at one point striking a one-year high of more than $53 a barrel. The International Energy Agency recently warned of the challenges facing OPEC, pointing out that oil production by its member states hit a high in September.
Finally, markets remained sensitive as always to central bank policy. The minutes of a September meeting of the Federal Open Market Committee, which sets interest rates at the Fed, were released last week, and showed that three members had voted against the September decision to leave rates on hold, preferring to raise them. The minutes added that a rate rise could come “relatively soon” – the December meeting is a possibility.
The yen see-sawed against the dollar last week, but ended slightly cheaper, while the Nikkei 225 ended almost flat. The euro rose against both the dollar and the pound, and the FTSEurofirst 300 rallied from Thursday’s two-month closing low to end the week down 0.2%, boosted by positive results from US banks. The ECB will decide this week whether to increase the scale of its bond-buying programme.
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