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Rathbone Weekly Commentary

Date: April 15, 2019

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Brexit – trick or treat?

It seems only fitting that our new Brexit date coincides with Halloween – will it be ‘trick’ or ‘treat’? After another good week for Theresa May’s airline reward scheme, the European Union (EU) and the UK have agreed to delay Brexit for six more months, unless a solution can be found sooner. That tin can is now a speck on the horizon having received its biggest kick so far and our predicted most-probable path, the never-ending story, is becoming a reality. Sterling barely moved on the news and the country remains shrouded in that now-familiar uncertainty.

The major stipulations of the extension are: fielding candidates in the EU election next month; no renegotiation of the Withdrawal Agreement; behaving properly in the European Parliament during the interim period; and being good, cooperative EU citizens.

Consequently, the Conservatives have sent out a request to their approved-candidates list for people willing to stand in the European elections and even Nigel Farage is selecting candidates from his new Brexit Party (yes, he’s back) . The Prime Minister still seems determined to get a deal done before 23 May, but my cynical side tells me that’s a bit of a long shot.

When Donald Tusk was asked whether the EU would consider a further extension, he rather ominously didn’t rule it out, which does indicate that the EU doesn’t want us to crash out without a deal, just as much as we don’t want to . Overseas investors may begin to view sterling and UK assets as more attractive if they don’t think we will crash out of Europe. This is the glimmer of hope to which we will cling, but a no-deal scenario is still on the table.

So, where does the government go from here? Political deadlock like this is typically resolved by a general election, but there doesn’t seem much appetite for one of them. A second referendum is an oft-uttered phrase, but one that meets with opposition and uncertainty. Talks with Labour continue, although hopes of a compromise are not high.

The possibility of striking a softer Brexit encompassing a customs union arrangement before October has risen; this may also involve some form of people’s vote on the deal itself. There is now also a higher possibility of Article 50 being revoked if the Westminster parliament cannot reach a consensus around a deal. We may even embark on a long negotiation to strike a Canada-style deal, which would be multi-year in the making.

The circles under Mrs May’s eyes are a reflection of the national mood when it comes to Brexit: grey and darkening. Brexit is here to stay, for another six months at least. But well-diversified UK investors shouldn’t fret too much – some three quarters of FTSE 100 index companies’ earnings are sourced from abroad.

Source: FE Analytics, data sterling total return (%) to 12 April

Globalisation in reverse

Markets fell amid concerns about a US/Europe trade war following Donald Trump’s threats. On this particular occasion, it was over the familiar claim that Europe’s subsidies give Airbus an unfair advantage over Boeing. This has reappeared centre stage as the World Trade Organisation ruling will be announced shortly on the charges the US lodged 14 years ago. If they lose the case, they are threatening tariffs on $11 billion worth of European exports, everything from artists’ paint brushes and cheese through to motorcycles and aero products. This is ahead of the resumption of general trade discussions between the US and Europe and sets the stage for a bruising round of meetings. Over the weekend, the EU retaliated with $12 billion of US exports subject to tariffs.

The US/China trade talks are rolling on, although no date has been fixed for a meeting between the presidents. Negotiations start with Japan this week and the sticking point looks set to be around agricultural exports and US access to the Japanese market for such products. These continued trade talks are likely to feature prominently on the radar of every investor for the foreseeable.

An eight-day winning streak of positive returns for the S&P500 index was broken last Tuesday, and investors turned more cautious ahead of the Q1 reporting season, which started on Friday. Sentiment was not helped by the IMF lowering its global growth forecast to 3.3% for 2019 (from 3.5%), citing slower Chinese and European growth, but it remained positive about the outlook for 2020.

Bonds
UK 10-Year yield @ 1.23%
US 10-Year yield @ 2.56%
Germany 10-Year yield @ 0.06%
Italy 10-Year yield @ 2.54%
Spain 10-Year yield @ 1.07%

Economic data and companies reporting for week commencing 15 April


Monday 15 April

US: Empire State manufacturing index, NAHB housing market index

Company results: Citigroup, Goldman Sachs, Carr’s Group

Tuesday 16 April
UK: Unemployment
US: Industrial production
EU: German ZEW economic sentiment

Company results: Rio Tinto production, Johnson & Johnson, JD Sports, Card Factory, Ashmore, Hays, Bank of America, Blackrock, Netflix, Omnicom

Wednesday 17 April
China: GDP
UK: CPI and RPI inflation
EU: CPI
US: Fed’s beige book; trade balance
Retail sales, US PCE, retail sales, personal spending, Philly Fed Manufacturing Index, and Unemployment Claims

Company results: Bunzl, BHP Billiton production, Abbott Labs, ASML, Roche, Quilter, Segro, Mediclinic, Morgan Stanley, United Rentals, PepsiCo

Thursday 18 April
UK: Retail sales
US: PCE inflation; retail sales; personal spending; Philly Fed manufacturing index; weekly jobless claims

Company results: Rentokil, Unilever, Aveva, Schlumberger, Reckitt Benckiser, RWS, Domino’s Pizza, Moneysupermarket, PZ Cussons

Friday 19 April – Good Friday, markets closed

 

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