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MARKET UPDATE: MORE PRESSURE ON MAY WHILE STERLING TAKES A SLIDE

13th November 2017

LAST WEEK – KEY TAKEAWAYS

UK given two weeks to clarify Brexit bill
The EU’s chief Brexit negotiator Michel Barnier has given the UK two weeks to clarify what divorce it will pay if progress is to be made in Brexit talks. The so-called ‘divorce bill’ has proven to be a barrier to negotiations, but the EU is demanding clarity on monetary commitments before it will open talks on a transition period on the principles of a future trading deal. Next month, an EU summit will determine whether enough progress has been made on preliminary issues to allow Brexit talks to move on to the next level. More pressure was piled on prime minister Theresa May over the weekend with reports that 40 Conservative MPs had agreed to sign a letter of no confidence in her leadership – this in turn meant the pound took a tumble on Monday morning.

Trump’s Asia tour ramps up pressure on North Korea
Donald Trump used the platform of his visit to Asia to issue more warnings against North Korean leader Kim Jong-un. At a speech at the Asia-Pacific Economic Cooperation summit in Vietnam, the US president asserted that the region must not be “held hostage to a dictator’s twisted fantasies of violent conquest and nuclear blackmail”. The tour across Japan, South Korea, China, Vietnam and Philippines has seen Trump look to garner support for further sanctions on Pyongyang.
Chinese inflation on the rise
China’s consumer price inflation (CPI) accelerated to 1.9% in October year-on-year, which was higher than had been forecasted. According to the National Bureau of Statistics, the producer price index rose 6.9% in the same period, unchanged from the previous month’s increase. It was also revealed that the country’s trade surplus with the US fell to $26.6bn in October, from $28.1bn. As previously discussed (see Market Update 6/11/17), one serious concern for investors is China’s mounting debt.

Investors frustrated with delay on US tax reforms
Stock markets have been preoccupied with a perceived lack of progress on US tax reform. With a Thanksgiving break fast approaching, there are fears that the signing off on a concrete tax reform plan is likely to be delayed, which could in turn weigh on the value of the dollar. There are discrepancies between plans delivered by House of Representative and Senate Republicans, including a delay in the implementation of a corporate tax rate cut.

UK manufacturing sees September surge
UK manufacturing output grew by 0.7% from August to September, more than double the expected 0.3% figure. The growth, according to the Office for National Statistics, was driven by increases in the production of computer, electrical and general machinery and equipment. Total production output, including commodities, climbed by 0.7%, for the sixth consecutive month.

LOOKING AHEAD – TALKING POINTS

Crucial UK data due before Autumn Budget
With chancellor Philip Hammond set to outline his Autumn Budget on 22 November, this week sees the release of crucial data on the state of the UK economy. Official statistics are due for inflation and unemployment. While the latter remains under control – the jobless rate stood at a 42-year low of 4.3% between June and August this year – rising inflation could be problematic. Economists polled by Reuters believe the headline data will show that inflation climbed to 3.1% last month, up from 3% in September. Others believe the figure will be higher as the impact of the weaker pound feeds through to higher prices. Either way, inflation above 3% will require the Bank of England governor Mark Carney to write to Hammond to explain why the figure is so far in excess of the Bank’s stated 2% target. The UK economy is expected to lag behind many of its European neighbours this year – last week the European Commission cut its growth forecast for 2017 from 1.8% to 1.5%.

UK Consumer Price Inflation (September 2012 – September 2017)

Rsz _1rsz _united -kingdom -inflation -cpi _1

Source: Office for National Statistics, TradingEconomics.com

 

Time for a move in US inflation?

Fresh inflation data is also due from the US this week. It will be the final reading of the Consumer Price Index (CPI) before next month’s Federal Reserve meeting, where officials are widely expected to initiate an interest rate rise (the market is currently pricing in a 92% probability of a December rate rise). The annual core inflation rate, which excludes food and energy prices, has stood at 1.7% for the past five consecutive months.

US retail sales figures are also due, a key indication of the mood of consumers’ willingness to spend. The last month-on-month figure showed a sharp 1.6% rise in September, buoyed by a surge in receipts at services stations, which reflected higher gasoline prices after hurricane Harvey disrupted production at oil refineries in the Gulf Coast. The big spending, of course, happens between Thanksgiving and Christmas, and global advisory business FTI Consulting last week published its 2017 US Holiday Retail forecast, which projects 4.5% growth in discretionary holiday spending, an increase from 3.3% during the 2016 season.

US Retail Sales (September 2016 – September 2017)

Rsz _united -states -retail -sales

Source: US Census Bureau, TradingEconomics.com

THE OMNIS VIEW

Through a well-diversified approach to asset allocation, the Omnis investment team aims to defend and grow the value of your portfolio through market cycles. Further falls in sterling on Monday, to fresh recent lows against the dollar at $1.3070, flies in the face of some analysts who had predicted the currency had bottomed out. The Openwork Wealth Services Limited investment team have remained underweight the pound in their portfolios since the formation of the Service in April 2017, and recently increased that underweight with a move into Asia Pacific equities.

 

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