Darkness descended across the European continent on Saturday evening as a fresh wave of populist activity gripped voters spanning from the Atlantic to the Caspian Sea. That’s right, the Eurovision Song Contest once again appeared on millions of people’s television sets. Unfortunately for SuRie, the UK’s representation at the contest, her performance in the final was disrupted by a stage protestor and despite maintaining both her calm and her composure, the UK finished 24th.
The markets managed to remain calm in the face of disruption too, after the United States pulled out of the Joint Comprehensive Plan of Action (more frequently known as the Iran deal), and even regained composure with all but one market closing in positive territory for the year-to-date. Asset class returns in sterling and local currency are below and most notably riskier assets such as equities and oil have outperformed traditional safe havens including bonds and gold.
Table 1: GBP total returns
Table 2: Local CCY total returns
From a UK investor’s perspective, perhaps the most notable event was the interest rate decision by the Bank of England on Thursday, which resulted in no change to the base rate. As I alluded to in my piece titled Carney’s Conundrum (20th April 2018), the UK’s inflation figure has fallen at a faster rate than expected in recent months which has unnerved investors positioned for a rise in interest rates. This, in conjunction with weaker than expected economic survey data is sure to have had an impact on the Bank’s thought process as to whether the economy can weather another 25 basis-point rise.
Chart 1: Composite Purchasing Managers Index (PMI) for the UK economy; above 50 is expansion, below 50 is contraction
Source: Bloomberg, Markit
Some commentators have argued the reality of the UK’s decision to withdraw from the European Union is beginning to bite economically, while others have blamed the Brexit uncertainty caused by irresponsible infighting in Westminster, both at a Parliamentary and a Cabinet level. This is evidenced by the split becoming ever more evident in British politics between two groups: extreme Remainers, delighting in the Government’s failure (i.e. the ongoing defeats related to Brexit legislation in the House of Lords); and extreme Leavers, failing to concede the existence of any risks related to withdrawal. As a consequence, OECD figures released in April have revealed that the United Kingdom recorded its lowest level of Foreign Direct Investment (FDI) inflows since 2005, totalling at a paltry $15 billion when compared to the 2016 figure of $196 billion.
Chart 2: European Commission Economic Sentiment Indices for the UK and EU27 (EU ex UK)
Source: Bloomberg, European Commission
The deterioration in economic sentiment in the UK since the middle of 2017 relative to the rest of the European Union factors into this sharp fall in FDI. However, despite what appears to be a negative shadow overhanging UK plc, the Bank of England’s accompanying tone with the decision not to increase interest rates was surprisingly hawkish. In an interview with the BBC, the Bank’s governor, Mark Carney, said that a rate rise was “likely by the end of the year”, and that despite reducing growth forecasts by 0.4% for this year the economy is continuing to erode slack (e.g. unemployment and unutilised capacity) which is expected to lift inflation forecasts.
THE WEEK AHEAD: Eurozone Q1 GDP, US retail sales (Tues), Japanese Q1 GDP (Wed), Japanese inflation (Fri)
STAT OF THE WEEK: The percentage of Chinese steel production as a share of global output was 49% in 2017, versus 5% in 1980. (World Steel Association)
Data correct as at 11/05/2018.