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Hot in the News
Remember the recent ‘Happy New Year'? We are witnessing a global economic slowdown, in particular with China but also Germany and potentially the US. In addition to this, the Prime Minister, US President and French President are all missing the Davos meeting due to local issues. As for Brexit… well actually nobody knows what is going on. As for hedge funds, asset managers are seeing a strong outflow in AUM and a decline in operating margins.
Brexit:Less than 66 days to go before the Brexit deadline with the next Brexit vote for a plan B on the 29th of January. My view is that with a 230 deficit in the last vote, it will be hard to convince so many MPs to back up her plan unless the EU offers serious concessions.
So, what are the options? The first would be a no deal result, which is really not supported by any parties and unlikely, but if it happens it would have serious financial impact for the UK economy, GBP and for business.
The second would be an extension of article 50 to enable further negotiations with the EU which isunlikely to go anywhere, or prepare another referendum which is a growing possibility but raises the question of potential civil unrest.
The third would be to revoke Article 50; very unlikely but potentially best from an economic point of view.
Last but not least, a Norwegian style separation. This would make little sense but certainly positive for the economy.
At this stage, the Prime Minister is in a corner as whatever the outcome, about half of the UK's population will be not happy. Nevertheless, the market needs a decision... except a 'No-Deal' option.
The UK economy: Growth is down a further 0.3% in the 3 months to November and is now expected to be as low as 1.4% annually and well below BoE’s annual target of 1.7%: annual inflation (CPI) decreased to 2.1% due to the lower cost of petrol and air fares. Following on from this, unemployment was down to 4% up until November 2018, which is its lowest level since 1970. Annual wage growth continued to accelerate to 3.4%, the highest figure since July 2008.
To summarise, in a normal environment a slowdown in inflation with a further rise in wage growth should be positive for growth, but might impact inflation, as spending could lead to higher prices. However, with the current Brexit chaos, we do not have a stable environment and economic predictions are almost impossible as financial markets remain very volatile, adding to the fact that the Bank Of England will be unlikely to raise rates on the 7th of February.
Money Market fund managers(12/2018) £ weighted average maturity (WAM) is > than 45 days (next BoE meeting 7/02/2019) so the market does not favour a rate increase.
EU:Inflation has decreased further to 1.6%. EU zone (19) with unemployment down at 7.9% (the lowest since 2008) but Euro zone PMI is down further to 51.4%, the lowest for 32 months. Growth is down to 1.6% by 3rd quarter of 2018 and is expected to be less than or equal to 1.5%.
France: Annual growth is to be around 1.6% and expects its deficit to rise to 3.4% of GDP and 3.2% in 2019, due to the ongoing anti-government protests.PMI dropped below 49% from 51% in previous month with inflation at 1.9% year to year.
Germany:Annual inflation down to 1.7% but purchasing manager index (PMI) down to 51.5%.In 2018, growth eased to its slowest rate since 2013 to 1.6% and forecast for 2019 is around 1.5%.
So, it is confirmed that Euro zone is entering a more difficult period impacted by a global trade war, political uncertainty and ECB ending its QE stimulate programme. Nevertheless, we still believe that this could lead to the ECB changing its rate policy in late 2019.
USA:Although,the US government shut down and trade war are starting to hurt its economy, it still remains strong with annual growth at 3% in 2018 but expected to slow down to 2.3% in 2019.
Unemployment rose to 3.9% but so did wage growth, which rose to 3.2% year-on-year, the biggest advance since 2009, and inflation is down to 1.9%.
Updated on 22/01/2019
Bank of England: Although Libor is up to 0.93%, inflation is getting closer to the 2% target despite wages growth. Nevertheless, Brexit will skew any decisions, and we do not expect a rate increase at the next meeting on February 7th -notwithstanding a Brexit decision and significant rise in inflation.
Fed: As expected, we had a rate increase at theFOMC meeting on the 18th and 19th December.For 3 months USD Libor is at 2.77%, down from 2.80%. Today’s slope 3 months’ versus 10 years’ Treasury is further down to 0.33%, 2-year Treasury is down to 2.585% from 2.73% while the 10-year Treasury is also down to 2.75% from 2.88%. We see a further flattening of the yield curve from last month and a further sign of a slight economic slowdown. This coupled with Donald Trump intensifying pressure on the Fed, we do not expect a rate increase at the 29th / 30th January meeting.
ECB: As expected, there was no rate increase at the latest ECB monetary policy meeting on 13th December. However, ECB is officially stopping its quantitative easing programme (QE) and might need other actions to stimulate growth. We now anticipate a change of economic policy in the first half of 2019. We do not expect a rate increase at the meeting on the 24th of January 2019.
Equity: Despite a slow start,equity markets are in positive territory due to better news on trade war, stable interest rates and with volatility at 80% (down 30% YTD). Nevertheless, markets remain cautious and volatile, and cash is still a good strategy.
UK & Europe: TheCAC 40 is at 4,867, 9% up YTD and the FTSE 100 is at 6,970 up 3.6% YTD.
USA: Boththe Dow Jones and S&P are up YTD with the former up 5.9% YTD at 24,706 and the latter up 6.5% YTD to 2,670.
With the US Dollar and the GBP at 1.29,up 1% YTD, reflecting a lower probability for a 'No-Deal'. Investors remain worried about Brexit discussions, but any good news on Brexit will strengthen the GBP further.
With the Euro and the US Dollar at 1.134 and likely to test the 1.13 level due to Germany and the Euro zone's negative sentiment and investors seeking safe haven assets.
With the GBP and the Euro at 1.13, this is up 1.2% YTD. A combination of a weak Eurozone economic outlook and lower probability for a 'No-Deal'. Sterling will continue to rise on any good news for Brexit.
Gold at 1280is down 0.1% YTD and is impacted by a stronger USD.
About Banks - January 2019
Atom Bank is to appoint an advisor for a potential sale, including to BBVA which already owns 40% of the bank’s capital.
Santanderhad hired Andrea Orcel from UBS, but could not convince the stubborn UBS to be flexible on deferred awards. As a result, Santander pulled out of the deal as they were not prepared to compensate the $50m package. The good thing is that Mr A Orcel will now have access to these deferred payments from UBS. What a mess!
Meanwhile Barclays,banks on the battle for investment banking against E Bramson, an investor who wants the bank to better focus on retail banking.
Contact our expert team for further market insights.
Akoni has not independently verified the information or data used in our rate review, which is based solely on public available information. Neither Akoni nor its advisors or officers are authorised to make any express or implied representation, warranty or undertaking as to the accuracy or completeness of this update. Furthermore the writer expresses his/her own opinion and not an investment advice.