Cash News - May resigns, a potential recession and a trade deal with Trump?

Yann Gindre
Posted by Yann Gindre
Posted on June 05, 2019 Leave a comment
   


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Hot in the News

The Game of Thrones final episode has received mix reviews but on the other hand the Brexit show is still full of surprises. 

  1. The UK Prime Minister was forced to resign
  2. 13 then 12 and now 11 candidates have now entered the leadership race.
  3. The Brexit referendum was on the 24th June 2016, soon to be 3 years ago.
  4. European Elections saw a rise of the Eurosceptic mostly due to the arrival of Nigel Farage. Having a pro-European majority is possible with the support of centrist groups.
  5. The Tory and Labour parties working together has failed, as expected.
  6. Donald Trump is now talking about a phenomenal trade deal with UK, however I wonder who will be the winner of such a deal.

On a more worrying note, several economists around the world are predicting the next financial crisis triggered by the increasing debt levels of both private & national due to the low interest rate policies and the speculation on financial assets (stock exchange, share prices and even the real estate bubble). Could they be right and should we be worried?

UK: BREXIT

 Going forward there are 3 obvious options:

  • A new deal- really? A new PM will negotiate a better deal within the time frame? We will need another extension.
  • A Hard Brexit- “Not afraid”, if you listen to the Home secretary, Sajid Javid or Boris Johnson or even Nigel Farage. For this, you need the EU to back down and trust Donald Trump's phenomenal trade deal; really?
  • A new referendum- why not? It has now been almost 3 years and the government has not been able to agree any deals so it will make sense to go back to the electors.

Let us stay tuned for the next episode.

As before, for a majority of UK firms Brexit is a growing source of uncertainty and is affecting their businesses.

The UK economy's rolling 3 month growth to March 2019,  greatly increased by 0.5%.

Unemployment (in March 2019) remains at 3.8%, its lowest level since October 1974. With wage growth (in March 2019) falling to 3.3% despite record employment levels.

Inflation (CPI) is up to 2.1%, above the BoE's 2% target, mostly due to rising energy prices.

To summarise, growth in the UK remains strong, but is it a result of factories building up stocks in preparation for Brexit? Economic predictions remain difficult until the market has a better vision and a new PM. Financial markets including the GBP will remain volatile.

Money Market fund managers (3/06/2019) GBP weighted average maturity (WAM) is about 50 days (next BoE meeting 20/06/2019) so the market is definitely not favouring a rate increase.

Europe:

  • The EU area- Inflation fell sharply to 1.2% in the year to May 2019. Unemployment in April dropped to 7.6%, the lowest since 2008 & the Euro Zone's PMI remains almost unchanged at 47.70 in May (was 47.7% in April). Growth for the first quarter is up to 0.4% and 1.2% year on year. The projection forecast for 2019 now at around 1.2%.
  • Germany- is showing more resilience to global economic challenges but will remain impacted by the escalating trade tensions. Growth expanded to 0.7% in the first quarter of 2019. Purchasing manager index (PMI) was at 44.3 in May 2019, which is a very little change from 44.4 in the previous month. April's unemployment rate rose to 5% for the first time in more than 5 years but year on year May's Inflation fell to 1.4% down from 2% in April.

USA:

Growth for the first quarter of 2019 was revised down to 3.1%, due to the renewed trade tensions with China and is now expected to ease off below 2% in 2019. April's unemployment rate decreased to 3.6%, while wage growth remains unchanged at 3.2%. Inflation (CPI) increased to 0.3% in April following an increase of 0.4% in March. For 12 months, April's CPI rose to 2% compared to 1.9% in March. Overall, the US economy is being negatively affected by the trade war with China.

Topical Issues

BoE Rate LIBOR £3m FTSE Yield Gold Volatility
Last Month Today Last Month Today Last Month Today
Today Today
0.75%   0.75% 0.83% 0.80%   4.43% 4.63%  1320 18.86% 

 

Updated on 05/06/2019
Interest rates and markets:
  • Interest rates: Libor is down to 0.80%, inflation is up to 2.1% with wage growth down to 3.1%. Despite higher inflation above the BoE's target (2%) & low unemployment, Brexit and a new election for a PM will force the BoE to keep the monetary policy steady and we do not expect a rate increase at the next meeting 20th June.
  • Fed For 3 months the USD Libor has been at 2.48, which is a decrease from 2.58%. Today’s slope for 3 months versus the 10 years treasury is inverted at minus 0.21%. The 2-year treasury is down to 1.875% from 2.31% & the 10-year treasury is down to 2.12% from 2.55%, this is more to do with a flattening of the curve and a reflection of the slowing economy due to US-China trade tensions. Although, an inverted yield curve is a sign of a potential recession, with only 13 days of inversion, it needs to be monitored over time to truly assess the situation. Although, we definitely do not expect a rate increase at the 18th -19th June meeting, the Fed might surprise all of us with a rate cut due to the rising economic risk posed by global trade tensions.

  • ECB: With a soft PMI and eroding inflation, we still do not anticipate a change of economic policy before the end of 2019. For more information, the German 10-year bund is back in negative territory to minus 0.21%, this is a real flight to quality. We do not expect a rate increase on the 6th June 2019 monetary policy meeting.

  • Equity: Although the first 4 months of 2019 shows strong equity performances, we are now witnessing stocks declining for 4 straight weeks. A combination of global trade tensions, the tense relationship between Eurosceptics and the EU and investors moving to lessen risks. Overall, the indexes remained in positive territory YTD but the US indexes are showing strong reductions. Volatility rose to 18.86%, only down 25% YTD (was down 37%).
  • UK & EuropeCAC 40 at 5,241, 11% up YTD. FTSE 100 at 7,184 up 6.8% YTD.

  • USABoth Dow jones and S&P up YTD with the former up 6.4% YTD at 24,819 and the latter up 9.5% YTD to 2,744.

Currency: 

  • USD/GBP at 1.26 is down 0.9% YTD. The USD's weakness opposed to the UK's political situation and the recent strengthening of GBP has stopped until further developments. Any good news on Brexit or the political front will strengthen the GBP.

  • Euro/USD at 1.1252 is down 1.87% YTD. However, the market is focusing on the US interest rates as it remains the key F/X driver 

  • GBP/Euro at 1.13 is up 1.6% YTD. A weaker USD is due to a potential risk of rate cuts in the US.      

  • Gold at 1320 is now up 1.8% YTD. It is benefiting from the global trade tensions and the fall in interest rate yield. Still a safe haven investment status.



About Banks - April 2019

  • Metro bank lost 16% in one day on the 2nd May as profit halves and customers start to worry, but it bounces back (5th June) as investors approved 92% the £375m capital raised.
  • Lloyds Bank maintains stable results despite ongoing Brexit insecurity, which is claimed by other banks on their lower results.
  • UBS investors revolt against the bank's performance after the €4.5bn fine for tax fraud.
  • UK financial regulator clamps down on peer-to-peer investment

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Yann Gindre
Deputy Chairman


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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. 

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