Weekly market recap – Reshuffle rally

Sterling sees meteoric rise following Sajid Javid's unexpected resignation.

FacebooktwitterlinkedinmailFacebooktwitterlinkedinmail   by Tertius Bonnin, 14th February 2020

A new poll has found that a majority of New Hampshire Democrats would rather a “giant meteor strikes Earth, extinguishing all human life” than see President Trump re-elected. In other news, NASA have recently confirmed in their near-Earth object database that an asteroid with the potential to end life on our planet recently passed through the solar system. Does anyone else have an overwhelming feeling of foreboding?

Sterling’s meteoric rise last week against the euro came as the UK’s Chancellor of the Exchequer unexpectedly resigned. Asset class returns in sterling and local currency are below; with the global markets flirting with a coronavirus-related sell-off, both sterling and UK government bond yields have risen following the appointment of a new finance minister.

Table 1: GBP total returns

Source: Bloomberg

Table 2: Local CCY total returns

Source: Bloomberg

Both Westminster and the City were stunned last week as the Chancellor of the Exchequer unexpectedly resigned amid a cabinet reshuffle. Sajid Javid was due to present the UK budget in March, the first since the country’s departure from the European Union at the end of last month. With Javid’s replacement, Rishi Sunak, having now moved into Number 11 just four weeks before the budget is supposed to take place, there is speculation that it will need to be delayed. Some now suspect that Javid’s fiscal rules which would have aimed to keep a balanced budget on day-to-day departmental spending may now be discarded in order to allow higher spending. In response, the value of UK government bonds slightly fell as investors began to price in expectations of the UK government beginning to loosen the purse strings.

Source: Bloomberg

The potential for fiscal stimulus comes at an interesting time for the UK economy where hard data (e.g. GDP growth) appears to be flat lining and soft data (e.g. activity surveys) appear to be rebounding. The divergence in data has been a source of recent debate at the Bank of England, where policymakers until recently looked all but certain to go ahead with an interest rate cut. Indeed, strengthening soft data (the surveys) since the general election in December appeared to have softened the Bank ahead of its January meeting and investors are now expecting the incoming Governor, Andrew Bailey, to continue holding rates into 2020.

Source: Bloomberg

With the current government committed to increasing infrastructure and day-to-day spending, it looks like the UK economy may become the first major European economy to benefit from its government opening the fiscal taps. Whether other European states will follow suit will surely be the topic of hot debate over the coming months.

STAT OF THE WEEK: $4.7 trillion – the amount of extra debt signed into law by Donald Trump since he became President (Committee for a Responsible Federal Budget).

DATA CORRECT AS AT: 14/02/10

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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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