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Rathbone Weekly Commentary

Date: January 14, 2019


Bottom of the ninth 
It’s Brexit meaningful vote time. Like the ninth innings of a baseball game, the stands have long since emptied out after the tourists realised just what they had signed up for. The only ones left watching now are the diehard fans and those who wandered in late.

A confused and fitful week of backroom hustling appears to have made little difference: the Prime Minister’s compromise deal is expected to be heavily defeated tomorrow. Theresa May won a few more MPs to her bloc last week, but lost two votes that ceded much control of the exit process to Parliament. Mrs May’s deal is equally despised by both the remain and leave camps precisely because it is a compromise. Exactly how this yawning divide can be bridged is the question of the decade. That’s why we still believe that a Never-ending story Brexit – a bare bones agreement that leaves all the detail (and most of the difficult decisions) to future MPs – is ultimately the most likely outcome.

This is a shame, and not just for tidy-mindedness or for the belief that our leaders shouldn’t shirk their responsibilities. It’s a shame because every new month of lingering doubt and indecision discourages investment. Foreign businesses avoid the UK when they may have started new operations or bolstered existing ones. UK businesses make arrangements to expand their overseas divisions and reduce spending on British ones to lessen the risk of a home market in turmoil. It also prevents the government from focusing on running the country.

Retail numbers have actually been alright recently – spending (excluding fuel) in the three months to 30 November was 4.2% higher than a year ago. However, that hasn’t buoyed listed retailers any. They have been discounting heavily to get shoppers to part with their cash and most are decidedly gloomy about 2019. Friday’s release of retail figures for the all-important Christmas season will be closely watched. On Tuesday the Bank of England releases its financial stability report on the same day that inflation is expected to fall by 20 basis points to 2.1%.

Index 1 week 3 months 6 months 1 year
FTSE ALL-Share 1.7% -0.7% -7.5% -7.3%
FTSE 100 1.2% -0.6% -7.2% -7.1%
FTSE 250 4.3% -1.0% -9.0% -8.1%
FTSE Small-cap 2.8% -1.5% -7.4% -8.2%
S&P 500 1.8% -1.6% -2.6% 0.4%
Euro Stoxx 1.3% -2.1% -9.5% -11.6%
Topix 2.9% -3.9% -3.7% -10.2%
Shanghai SE 2.5% 4.5% -6.2% -24.1%
FTSE Emerging Index 2.6% 9.4% -0.5% -8.0%
Source: FE Analytics, data sterling total return to 11 January 2019 


Go-slow government
Government is on a different sort of hiatus on the other side of the Atlantic. Most of the public sector remains on furlough after both President Donald Trump and congressional Democrats dug in their heels over the Budget.

Mr Trump wants $5.7bn to build a wall on the Mexican border, but Democrats refuse to sign it off. The president vacillated at the start of the showdown only to run back to his guns after a few days of bad press from right-wing cable news. The shutdown is the longest in history, easily beating the 21-day stretch in 1996 when Bill Clinton faced down a Republican-led Congress over public health spending and environmental measures. That disagreement ended with a compromise Budget consisting of some spending cuts and some tax hikes. Somehow, a similar result this time feels out of kilter with our era.

Despite a government on the go-slow, the market mood was better last week. It still feels cagey, but the trend was up. That probably had a lot to do with more cooing from Federal Reserve Chair Jay Powell. After causing panic with an ill-advised characterisation of putting the unwinding of quantitative tightening (the reversal of quantitative easing) on “auto-pilot”, he has been quick to reassure investors that his team are sensitive to the stock market. Whether that is actually part of his mandate is questionable. It all comes down to whether the wealth effect – people rein in spending when their stock portfolios fall – really is enough to push the US into recession, because if so it would flow through to the Fed’s dual mandate of steady inflation and low unemployment. Just more than half of Americans own shares, bolstered by the nation’s 401K retirement scheme, so it could have a reasonable impact. Still, whether it’s the job of a central bank to support the stock market is probably the economic question of our time.

Chinese trade data, released today, were terrible. Exports slumped 4.4% in December compared with a year ago (they were expected to grow 3%). Imports were even worse: rather than rise by 5% compared with a year ago, they fell 7.6%. Much of the fall was due to inward shipments of coal and soyabeans of roughly half the typical volumes. Analysts are beginning to fear that the trade war is only part of the reason for weak trade figures. Every year for more than a decade there has been at least one worry of an economic slowdown in China. The nation has grown considerably from a second-rate economy to one of the world’s powerhouses. Just how much debt was used to create this miracle and just how toxic is it? There are countless ways to cut the (limited) data and answer that question. One thing seems certain: a precipitous drop in demand for goods and services in China would have a significant impact on the global economy. Asia would suffer most, but European exporters would feel the pain as well, given the amount of machinery sent to the East. And then there’s Africa, which would no doubt miss the large amount of money poured into its nations from Chinese sovereign wealth funds. Don’t forget the Western companies that sell to China’s burgeoning middle classes, too.

We are watching China’s performance very closely indeed.

UK 10-Year yield @ 1.29%
US 10-Year yield @ 2.70%
Germany 10-Year yield @ 0.24%
Italy 10-Year yield @ 2.85%
Spain 10-Year yield @ 1.44%

Economic data and companies reporting for week commencing 14 January

Monday 14 January
EU: Industrial Production; GER: Wholesale Price Index

Trading update: Be Heard Group, Dechra Pharmaceuticals, JD Sports Fashion, Pagegroup, Revolution Bars, Tarsus

Tuesday 15 January
US: Advance Goods Trade Balance, Capital Goods Orders, Construction Spending, Durable Goods Orders, Factory Orders, Monthly Budget Statement, New Home Sales, Retail Inventories Trade Balance, Wholesale Inventories, Empire Manufacturing, PPI EU: GDP, Trade Balance

Final results: Elegant Hotels Group, Watkin Jones
Interim results: Games Workshop, Knights Group Holdings
Trading update: Ashmore Group, Boohoo Group, Big Yellow Group, The Gym Group, Hays, Mears Group, Provident Financial, Persimmon

Wednesday 16 January
UK: BOE Financial Stability Report, CPI, RPI, PPI, House Price Index
US: Wholesale Inventories, Wholesale Trade Sales, MBA Mortgage Applications, Retail Sales, Import Price Index, Export Price Index, Business Inventories, NAHB Housing Market Index, Fed Beige Book, Total Net Treasury International Capital Flows
EU: EU25 New Car Registrations; GER: CPI

Trading update: Bovis Homes Group, Cineworld Group, City of London Investment Group, Diploma, Headlam Group, Hochschild Mining, Kenmare Resources, Pearson, Secure Trust Bank, Tullow Oil

Thursday 17 January
UK: RICS House Price Balance, BoE Credit Conditions & Bank Liabilities Surveys
US: Housing Starts, Building Permits, Philadelphia Fed Business Outlook, Initial Jobless Claims, Continuing Claims
EU: Construction Output, CPI

Final results: Chemring Group
Quarterly results: Associated British Foods, Sage Group, SSP, Brown (N) Group, Premier Foods, Whitbread, Rio Tinto
Trading update: Experian, 4Imprint Group, Ibstock

Friday 18 January
UK: Retail Sales
US: Industrial Production, Manufacturing Production, Capacity Utilisation, University of Michigan Sentiment Survey

Trading update: Bakkavor Group, Henry Boot, Record


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