Weekly market recap – departure delay disrupt

Fears rise as UK economy shrinks for the first time since 2012.

FacebooktwitterlinkedinmailFacebooktwitterlinkedinmail   by Tertius Bonnin, 9th August 2019

A survey last week shed light on Britain’s most obscure phobias. Some of the more unusual cases (with the number of people receiving help for the phobia in brackets) included:

  • Arachibutyrophobia – the fear of peanut butter sticking to the roof of the mouth (1)
  • Anemophobia – the fear of wind (1)
  • Nomophobia – the fear of being without your mobile phone (2)

A link to the survey which includes the top 10 phobia is found here: https://www.bark.com/blog/fear-of-knees-and-the-wind-amongst-most-unusual-diagnosed-phobias-in-the-uk/

Markets should certainly not be feeling acrophobic (the irrational fear of heights) having come off record highs in recent weeks. Asset class returns in sterling and local currency are below; a lower than expected UK GDP print saw a sell-off in the pound, thus creating a buffer against falling global markets for sterling based investors.

Table 1: GBP total returns

Source: Bloomberg

Table 2: Local CCY total returns

Source: Bloomberg

Shock growth figures for the second quarter released on Friday revealed the UK economy unexpectedly shrank for the first time since 2012, thus creating a difficult economic backdrop for the newly appointed Prime Minister. Drilling down into the Office for National Statistics (ONS) data release, manufacturing – the dominant subset of the “Production industries” labelled in the chart below – led the contraction, contributing -0.23% of growth alone. In a statement, the head of GDP at the ONS said “manufacturing output fell back after a strong start to the year, with production brought forward ahead of the UK’s original departure date from the EU”.

This is because ahead of the original 29th March withdrawal deadline, manufacturers had frontloaded production and rescheduled routine factory shutdowns for the immediate aftermath of the original departure date. Particularly in the car industry, the shift in factory shutdowns which now cannot be repeated for the 31st October deadline had been part of costly and ongoing contingency measures which would have coincided with other plans like rationalisation, training for new customs procedures and rerouting logistics.

Chart 1: The manufacturing component of the Production industries led a significant contraction in UK growth as manufacturers unwound their contingency plans following the delay to the original EU departure date

Source: Office for National Statistics

Uncertainty has not been limited to the UK in more recent months, evidenced last month by the International Monetary Fund cutting its growth forecasts for the global economy. As the trade war between the United States and China continues to unsettle the global economy, it’s the trade sensitive global manufacturing sector that has been left most at risk. Thus the UK’s departure from the EU in October could take place in an already fragile global economy.

This has caused some of the more skittish investors and commentators to speculate that a disruptive “no deal” exit will cause shock waves through the world economy, tip Britain into a recession, and roil financial markets. Others believe that no matter what happens on Halloween, the unwinding of contingency planning in the manufacturing sector combined with a relatively strong UK consumer and resilient growth in service industries will help the UK economy avoid a technical recession (defined as two consecutive quarters of negative growth).

Chart 2: Fears of a “no deal” exit from the EU sparked the pound to sell off to its lowest level versus the dollar and the euro in recent years

Source: Bloomberg

So what does this all mean for markets? The weaker than expected growth will force the Bank of England to remain firmly in a “dovish” state of mind in which it will likely contemplate cutting interest rates to support the economy. This expectation has been partly reflected in the value of sterling which has fallen to multi-year lows versus both the dollar and the euro. With a significant amount of negative sentiment now “priced in” to sterling, a breakthrough in UK-EU negotiations which could remove the risk of the discussed instability will see a marked rise in the value of the pound.

THE WEEK AHEAD (G7 + China)

Monday: China Vehicle Sales, China M2 Money Supply, US Consumer Inflation Expectations

Tuesday: Germany Inflation Rate, UK Claimant Count, UK Average Earnings, UK Unemployment Rate, Germany ZEW Economic Sentiment Index, Eurozone ZEW Economic Sentiment Index, US Inflation Rate, US Redbook

Wednesday: Japan Machinery Orders, China Fixed Asset Investment, China Industrial Production, China Retail Sales, Germany Q2 GDP, France Inflation Rate, UK Inflation Rate, Eurozone Q2 GDP, Eurozone Industrial Production

Thursday: Japan Industrial Production, UK Retail Sales, US Retail Sales, US Industrial Production, US Manufacturing Production

Friday: Eurozone Balance of Trade, Italy Current Account, US Michigan Consumer Sentiment

STAT OF THE WEEK: 600 million – estimated number of people in sub-Saharan Africa without access to electricity (World Bank).

Data correct as at: 09/08/19

About the author: Tertius Bonnin

Tertius joined EQ in 2016 and is responsible for covering investment ideas within US, Global and Thematic equities. He sits on the fund selection committee and also supports the portfolio managers across a range of other responsibilities.

He passed Level I of the CFA exam in 2018, holds the Investment Management Certificate and has a BA in Business with Finance. He enjoys a variety of sports including skiing, cycling and running – and when not in the office he experiments with Asian cuisine.

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