Review of the week: Mutiny on the Bounty

As HMS Great Britain floats, becalmed, just off the cost of Normandy, Theresa May is planning a fourth run at the House of Commons for her Brexit deal. Meanwhile, roughly that number of mutinies are being hatched right out on the deck for all to see.

For months, it has been common knowledge that Mrs May’s days as Prime Minister are numbered. But events seem to be really speeding up now. Mrs May’s last-ditch attempt to pass her deal, following abandoned cross-party talks with Labour, is expected to be dead on arrival at the House in early June. If so, that tees up yet more disagreements in the Cabinet about a no-deal exit. The Brexiteers want to step up planning for a crash out on 31 October, while the remainers are worried that such a path would puncture the economy and break up the UK into separate states.

Brexit has already fractured the Conservative Party. Cabinet minister and former Prime Minister-hopeful Amber Rudd has teamed up with several other MPs to create the One Nation Caucus. Apparently 60 MPs strong, the group aims to block any candidate for Prime Minister who supports a hard Brexit. That sets them against Boris Johnson – widely seen as a frontrunner if any hustings were held – and Dominic Raab. Meanwhile, former Pensions Secretary and Brexiteer Esther McVey has launched a pressure group of her own: Blue Collar Conservativism. Ms McVey has embarked on a tour of country pubs to talk to real people about the real issues in a bid to differentiate herself from an extremely packed race (some papers say possibly 20 MPs are eying No.10). All of this intrigue and distraction hasn’t been good for the UK. Since the beginning of May, sterling has fallen about 1.8% against a basket of currencies that we trade with most. Added to that, 10-year UK government bond yields have been falling back to almost 1.00%. Bond yields tend to fall when inflation and economic growth rates fall, so falling bond yields isn’t typically a good sign for the economy.

Economic growth worldwide has been worrying many investors lately, so a few bits of good news were welcome. The University of Michigan US Consumer Confidence Survey soared to its highest level in 15 years, much higher than economists had predicted. The NFIB Business Optimism Index, a similar measure from small American businesses, also outdid expectations, as did the number of houses US builders started work on. On the other side of the world, Japanese GDP growth was a healthy 2.1% – better than the contraction that had been forecast. While a great result, there is a dark lining to this silver cloud: much of GDP growth was down to Japan selling more exports to people in foreign nations and Japanese buying fewer imported goods. Because this suggests a slowdown in household spending, it’s not a good sign for an advanced economy which depends mostly on this consumption for economic growth. A sales tax hike from 8% to 10% in October is likely to hit spending too.

Coming up on Wednesday, the US Federal Reserve (Fed) will release the minutes of its last monetary policy meeting. There will be an exceptional amount of scrutiny of the language used by Chair Jay Powell. Many investors are hoping that the central bank will cut interest rates from 2.50% to 2.25% sometime this year. If this happens, the stock market, all things being equal, would be worth more. That’s because lower interest rates reduce the time-value of money (how much you value £1 in the future compared with £1 today). If the time-value of money falls, it increases the amount you would be willing to pay today for a series of payments in the future. And a series of payments in the future is simply what we call stocks and bonds.  

Source: FE Analytics, data sterling total return to 17 May

As you were

Global stock markets had another rocky week as the US and China traded yet more tariff threats.

As the barney with China intensifies, the White House has eased its harsh trade stance against the EU and Japan, postponing a final decision on implementing extra border taxes on imported cars for six months. America is also preparing to lift punishing tariffs on steel and aluminium that arrive in the US from Canada and Mexico. That’s great news for both the nations involved and for American consumers, who should benefit from lower prices. It’s a little late for US soybean farmers, however. After their crops were left stranded by China’s retaliatory tariffs, many farmers couldn’t afford to build storage silos because of large increases in the price of the metal needed to build them.

It seems like the US is making peace with its friends while tightening the screws on China. Last week, the US government added Huawei, the Chinese phone giant, to its ‘Entity List’. This list includes companies that the Department of Commerce believes are a national security threat or operating against US foreign policy interests. If you’re on the list, American companies are barred from transferring technology to you. That means Alphabet can no longer licence its apps to Huawei, which would be a substantial hit to its revenue: Huawei makes almost a fifth of the world’s smartphones. In total, Huawei buys about $67 billion (£52.6bn) worth of components each year, so it’s no surprise that the news has hit US hardware companies too: Qualcomm, Intel and Broadcom have all lost ground this morning in anticipation of further boycott announcements.

The Indian election winds to a close this week after seven phases of voting that started back on 11 April. Exit polls suggest standing Prime Minister Narendra Modi will return to the job with a comfortable margin. Another five years of Mr Modi’s leadership should boost the Indian stock market. The prospect of his leadership, at least. It’s impossible to say how Mr Modi’s government will fare as it continues to reform India. Mr Modi’s party has campaigned on a bunch of economic boondoggles and a heavy hand on security. This is, of course, completely different to the pitch Mr Modi gives global businesses. The one about shredding bureaucracy, eradicating corruption and rolling back onerous regulations and economic controls. There’s no reason why Mr Modi can’t deliver for both audiences, but investors should most definitely keep in mind what he has promised his home crowd.

But political polling has been wrong before – most recently in last week’s Australian election. The ruling Liberal-National coalition had trailed Labor in the polls for years and even exit canvassing pointed to a Labor win. But hours later, with 70% of the ballots counted, the result was so stark that the Labor leader conceded and resigned at the same time. It’s not just the polls that make this so surprising. The centre-right coalition has been bungling and scandal-ridden, led by a revolving door of leaders. Australia’s 28-year recession-free streak remains intact, but GDP growth has slipped lower over the past few years. Wages are slipping behind and more Aussies are feeling the squeeze. So how did the Liberal-National coalition pull off the comeback? It’s the economy, stupid. The ‘climate change election’ turned out to be nothing of the sort.

 

Bonds

UK 10-Year yield @ 1.03%

US 10-Year yield @ 2.39%

Germany 10-Year yield @ -0.11%

Italy 10-Year yield @ 2.66%

Spain 10-Year yield @ 0.87%

 

Economic data and companies reporting for week commencing 20 May

Monday 20 May

US: Chicago Fed National Activity Index, Fed’s Jay Powell speaks in Atlanta

EU: Current Account

Final results: LXI REIT, Ryanair

Trading update: Foxtons

 

Tuesday 21 May

UK: BoE’s Mark Carney Speaks in Parliament, CBI Trends Surveys

US: Existing Home Sales

 

Final results: Assura, Bloomsbury Publishing, Big Yellow Group, Cranswick, Footasylum, Halfords, Homeserve, Scapa Group, Schroder Real Estate Investment Trust, Severn Trent, Warehouse REIT

Interim results: Greencore, Premier Veterinary Group, Shaftesbury, Topps Tiles, UDG Healthcare

Trading update: Provident Financial

 

Wednesday 22 May

UK: Inflation, House Price Index, Public Finances

US: FOMC Meeting Minutes (1 May Meeting)

EU: ECB’s Mario Draghi Speaks in Frankfurt

Final results: Babcock International Group, HICL Infrastructure, Marks & Spencer, Picton Property Income, Royal Mail

Interim results: Britvic, Paragon Banking Group

Trading update: Close Brothers

 

Thursday 23 May

US: New Home Sales, Services and Manufacturing PMIs, Kansas City Fed Manufacturing Activity

EU: EU Parliament Elections, Services and Manufacturing PMIs; GER: GDP (Q1 Final)

Final results: Dairy Crest Group, Mothercare, QinetiQ Group, TalkTalk Telecom, Tate & Lyle, United Utilities,

Interim results: AJ Bell, Hollywood Bowl Group Mitchells & Butlers

 

Friday 24 May

UK: Retail Sales, CBI Reported Sales

US: Durable Goods Orders

Final results: Urban Logistics, Westminster Group

Trading update: Spectris