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Rathbone Weekly Commentary

Date: May 22, 2018


The good oil

Shrugging off steadily worsening economic data, the FTSE 100 hit a record high of 7,779.5 on Thursday. It has since gone higher this morning and has eclipsed the intra-day record notched up in mid-January, too.

Large-cap UK companies were no doubt boosted by the oil price hitting $80 a barrel – the highest level in four years. Greater sanctions on Iran have turned off the taps for some of the world’s largest oilfields before they even started to get going again. Another Middle Eastern exporter, Qatar, is also labouring under sanctions, while the Opec cartel is doing a stand-up job of curtailing production. Venezuela’s production is in freefall as the badly managed country disintegrates like a paper bag in the rain.

As for US shale oil producers, while they have been increasing output to make the most of higher prices, it hasn’t been the anchor on prices that some thought it would. The US Energy Information Agency (EIA) expects US production to jump 15% this year, followed by an 11% rise in 2019. In some places, technological improvements are allowing the drillers to extract oil and gas up to a third faster than before. However, there are prosaic impediments to a shale oil revolution. It’s becoming harder to find skilled workers for projects in the middle of nowhere. Labour rates are rising, as is the cost of the water that’s needed to put the hydro in hydraulic fracturing. And there are also bottlenecks for getting oil and gas to customers: for a really dramatic uptick in shale oil production there would need to be a significant investment in pipelines to move the gas and oil to market. That will take time and money, so it could be a handbrake on exceptional increases in production for the next year or so.

It’s not just supply pressures squeezing the oil price higher either. The US is positively booming, according to both the data and our analysts recently back from a trip across the pond. Companies are busy and profitable, and it appears the recent tax cuts have been shared with workers in the form of stock awards and cash bonuses. All this has set off a wave of confidence in America that should flow through to the global economy as well. It probably already is, with Europe recovering from its long recession and Asian growth humming. That’s pushing up the price of oil and raw materials even further.

As long as China and the US don’t get into an aggressive and escalating trade war, greater confidence on America’s Main Streets should mean greater demand for the world’s factories in Asia. And that would mean more orders for the, typically, European companies that manufacture the industrial machinery and equipment used in the East. This is idealised somewhat, but broadly this is why the world is so interconnected these days. Everything is intertwined, which is what makes attempts to unravel it unnerving.

Index 1 week 3 months 6 months 1 year
FTSE ALL-Share 0.8% 8.0% 7.6% 9.0%
FTSE 100 0.8% 8.3% 7.6% 8.8%
FTSE 250 1.1% 7.4% 7.4% 9.4%
FTSE Small-cap 0.8% 5.4% 6.3% 11.2%
S&P 500 0.1% 3.8% 3.8% 12.2%
Euro Stoxx -0.7% 3.8% 2.1% 8.7%
Topix 0.5% 5.3% 3.4% 15.4%
Shanghai SE 0.9% 2.9% -3.7% 7.7%
FTSE Emerging Index -1.7% -2.0% -0.3% 12.2%
Source: FE Analytics, data sterling total return to 18 May 2018


Bottoming out

We have an exciting week coming up for fans of UK data. A run of important measures should give us some idea of whether Britain is benefiting from the global uptick in confidence and demand.

It’s been a pretty rotten winter for the denizens of the grey isle. GDP and PMIs have been falling away, retail spending is decelerating and confidence seems at a low ebb. Brexit arguments bounce from Brussels to No. 10 and Parliament and back again with no clear headway. Sometimes it seems the UK is almost in limbo and cut off from the rest of the world. UK winters are long and depressing at the best of times, a great cloud of uncertainty doesn’t help. For the most part, the on-going wrangling seems to be avoided by those that can (Bank of America Merrill Lynch fund manager sentiment in UK equities has been its lowest since the global financial crisis in recent months). As for those that can’t, Brexit has simply become part of the furniture. Like a stain on the sofa that you cover with a blanket till you can afford to buy a replacement.

But as we have said before, confidence is key! There is nothing the British people love more than a run of gorgeous weather like we’ve had. It gets people out into the parks and pubs and backyards to top up on vitamin D and just makes them feel better. There must be a multiplier effect when it coincides with a royal wedding. The Fifa World cup kicks off next month too, another chance for Brits to enjoy themselves. UK retail sales are expected to be just 0.1% higher than the same time last year, a rather low bar. Any outperformance will be heartening.

Inflation has eroded much of the paltry wage increases for the average worker, but headline CPI has swiftly dropped from 3% to 2.5% in a matter of months. On Wednesday it is forecast to be flat (rising oil prices will be an upward influence), but a drop toward the Bank of England’s target would be welcomed by many. It would also push the worry of rising interest rates further into the future – no bad thing for bond and share prices.

Finally, the preliminary GDP growth rate for the first quarter will be released on Friday. It’s forecast to remain stable at 1.2% after several quarters of deceleration. One thing we’ve noticed is that the Citgroup Economic Surprise Index – whether UK data are better or worse than expected – has fallen to its lowest level since 2012. This is typically close to where expectations are so gloomy that reality struggles to match it.

We believe the UK should be able to pull itself out of its malaise for the summer.


UK 10-Year yield @ 1.50%
US 10-Year yield @ 3.06%
Germany 10-Year yield @ 0.58%
Italy 10-Year yield @ 2.22%
Spain 10-Year yield @ 1.43%

Economic data and companies reporting for week commencing 21 May

Monday 21 May

US: Chicago Fed National Activity Index

Final results: LXI REIT, Ryanair Holdings
Interim results: Jersey Electricity

Tuesday 22 May

UK: Public Sector Net Borrowing

Final results: Big Yellow Group, Bloomsbury Publishing, Cranswick, Entertainment One, Halfords, Homeserve, Intermediate Capital Group, NEX Group, Pets At Home Group, Scapa Group, Schroder Real Estate Investment Trust
Interim results: Greencore Group, Oxford BioDynamics, Shaftesbury, UDG Healthcare, Watkin Jones
Quarterly results: Nostrum Oil & Gas
Trading statement: Close Brothers Group, Galliford Try

Wednesday 23 May

UK: Consumer Price Index, Retail Price Index, CBI Industrial Trends Surveys
US: MBA Mortgage Applications, New Homes Sales, Crude Oil Inventories

Final results: Assura, Dairy Crest Group, Great Portland Estates, HICL Infrastructure Company, Marks & Spencer Group, Severn Trent, Vedanta Resources
Interim results: Britvic, EasyHotel, Hollywood Bowl Group, Sanderson Group, Stride Gaming, ZPG
Trading statement: Bovis Homes Group, Hilton Food Group, Keller Group

Thursday 24 May

UK: Retail Sales
US: Continuing Claims, Initial Jobless Claims, House Price Index, Existing Home Sales
EU: GER: GFK Consumer Confidence

Final results: Caledonia Investments, Electrocomponents, NewRiver REIT, QinetiQ Group, Talktalk Telecom Group, Tate & Lyle, United Utilities Group, Young & Co’s Brewery
Interim results: Daily Mail & General Trust, Paragon Banking Group, Shoe Zone
Trading statement: Balfour Beatty, Go Ahead Group, Huntsworth, Intertek Group, Kingfisher

Friday 25 May

UK: BBA Mortgage Lending Figures, GDP (Preliminary), Index of Services
US: Durable Goods Orders, University of Michigan Confidence
EU: GER: IFO Business Climate, IFO Current Assessment, IFO Expectations

Final results: Pennon Group, SSE, Volvere
Trading statement: Spectris



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