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Rathbone Weekly Commentary

Date: July 16, 2018


Reality bites

The beautiful thing about the World Cup is how it reminds you that we are all of us alike.

For all the talk of a Russian police state, the tournament has shown that the politsiya can be as attentive and permissive as British bobbies. Victorious Parisians cheered into the Sunday dusk, delirious with delight, but they ended up torching their own neighbourhoods and staggering home with tear gas and smoke in their lungs. That could have been London, Glasgow, Swansea or Santiago. And it’s not particularly surprising that the World Cup champions were the ones doing the rioting rather than the Croatians. There was more trouble on UK streets following the quarter-final win than there was following the semi-final loss.

Having your hopes dashed is a sad yet grounding experience. Like rooting for a salmon to escape the bear, defeat tends to feel inevitable in hindsight. It’s when the unbelievable happens that the thin veneer of reality and society is peeled back, causing euphoria and mayhem. Sometimes there’s less strain on a society if it doesn’t get what it wanted.

The UK has had a tough couple of years since it voted to leave the EU. Half-cooked plans and hedges and fudges and vitriol and frustration have been the daily reality for Britons since the referendum. The government has struggled to do most anything but argue bitterly over a confoundingly intricate relationship with the Continent. The latest – and maybe last-gasp – attempt by the Prime Minister to set out a coherent and agreeable strategy has been savaged by critics on both sides. One former Cabinet member is now calling for a second referendum, but this time a three-way query: Theresa May’s Chequers agreement, a no-deal Brexit or remain.

It seems like anything would be better for the country than this antagonistic stasis. We need to move on. We need to focus once more on the future and how to ensure we can improve our lives and pass on a better world for our children. The UK’s little-known quality of life stats have been improving over the past few years; however, looking beneath the surface is illuminating. Life satisfaction and happiness are significantly higher for those 60 and above; it craters for the middle-aged. Are these people the JAMs – the squeezed middle – Mrs May used to talk about so often? How long before we can sort out the real day-to-day problems like tangled train networks, looming power shortages and poor tax systems that plague them?

Because it’s these things that will boost the country and help it grow in the 21st century.

Index 1 week 3 months 6 months 1 year
FTSE ALL-Share 0.6% 6.4% 0.8% 8.0%
FTSE 100 0.6% 6.6% 0.8% 7.6%
FTSE 250 1.0% 5.8% 1.2% 10.0%
FTSE Small-cap 0.2% 4.2% -0.3% 8.6%
S&P 500 2.1% 14.2% 5.0% 13.7%
Euro Stoxx 0.3% 4.6% -1.6% 3.8%
Topix 1.1% 3.5% -4.2% 7.9%
Shanghai SE 3.0% -9.2% -17.2% -12.6%
FTSE Emerging Index 2.3% 0.6% -6.1% 3.6%
Source: FE Analytics, data sterling total return to 13 July 2018


Plodding along

A 25-basis-point interest rate hike is sneaking up on the UK, with swap markets almost locking it in for next month. The last couple of hurdles will be the inflation print and retail sales growth which are due on Wednesday. Inflation is expected to jump 20bps to 2.6%, and if so it seems likely that the Bank of England will push ahead with its second hike in nine months.

It’s a difficult time for the central bank, with business and consumer confidence falling alongside GDP growth, while inflation remains stubbornly high, eroding what little increase there has been in wages. House prices are also plateauing, a typically worrying phenomenon for a nation heavily bound to property market fortunes. While we believe another rate rise won’t push the UK into recession, the sluggishness of important economic measures is worrying. Especially as bellicose global trade talks become the norm. Jumping out of a trading bloc at a time of global protectionism is not exactly emboldening.

US President Donald Trump’s trade torpedoes have started to dent US confidence: the University of Michigan’s consumer mood thermometer has been trending downwards for several months. The US treasury yield curve has flattened further over the past month, something that tends to suggest long-term growth will falter. The difference in annual returns between a 1-year bond and a 10-year one have fallen to just 48bps, the lowest level since 2007.

However, the vital signs of the US remain strong. Today America releases its retail sales and industrial production numbers, both of which have been cruising along admirably. The housing market numbers come out on Wednesday: mortgage approvals, residential property sales and building starts. These have been doing very well lately, and there’s no reason to believe they won’t continue their trajectory.

There’s gloom out there, but just as surely there is reason for optimism.

UK 10-Year yield @ 1.27%
US 10-Year yield @ 2.83%
Germany 10-Year yield @ 0.34%
Italy 10-Year yield @ 2.55%
Spain 10-Year yield @ 1.26%

Economic data and companies reporting for week commencing 16 July

Monday 16 July
EU: Balance of Trade
US: Retail Sales, Business Inventories
Final results: W H Ireland Group

Tuesday 17 July
UK: Claimant Count
US: Capacity Utilisation, Industrial Production

Final results: NCC Group
Interim results: Amino Technologies, Arbuthnot Banking Group
Trading update: Galliford Try, Royal Mail, Scapa Group, SSP Group, TalkTalk Telecom

Wednesday 18 July
UK: Consumer Price Index, Producer Price Index, Retail Price Index
EU: Consumer Price Index
US: MBA Mortgage Applications, Building Permits, Housing Starts, Crude Oil Inventories

Quarterly results: EasyJet
Trading update: Alliance Pharma, Carr’s Group, Close Brothers, GVC Holdings, Premier Foods RPC Group, Severn Trent

Thursday 19 July
UK: Retail Sales
US: Continuing Claims, Initial Jobless Claims, Philadelphia Fed Index

Final results: Sports Direct International
Interim results: Breedon Group, Moneysupermarket, Nichols, Unilever
Trading updates: Anglo American, AO World, Babcock International, Big Yellow, Euromoney Institutional Investor, Hilton Food Group, Mothercare, SSE

Friday 20 July
UK: Public Sector Finances
EU: Current Account; GER: Producer Price Index

Interim results: Acacia Mining, Beazley, Schlumberger


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