Perhaps somewhat out of character, I thoroughly enjoyed flicking my attention between the tennis on one screen, to the cricket on another. I’m not a cricket fan but watching the England team beat New Zealand by the skin of their teeth to secure themselves their first ever world cup victory was pretty satisfying.
While outside of the US markets were pretty stumped, last week saw the S&P 500 breach the 3,000 point milestone for the first time, thus reaching a record high. Asset class returns in sterling and local currency are below; while oil was the largest mover last week following a larger than expected drop in US crude stocks, sterling investors experienced their own ups and downs following mixed data emerging from the Office for National Statistics.
Table 1: GBP total returns
Table 2: Local CCY total returns
Last week was characterised by relatively turbulent trading sessions for sterling investors as emergent data continued to paint a mixed picture of the UK economy. Though year-on-year GDP figures were relatively robust, production data across the economy were below expectations with manufacturing production actually revealing no growth from the same time last year. Services – the largest part of the UK economy – continued to contribute the lion’s share of GDP growth with high tech (Information and Communication) and high skilled (Professional, scientific and technical activities) industries leading the way. Meanwhile, the largest detractor came from Financial and Insurance activities which makes up around 7% of the economy.
Chart 1: Services remain the dominant driver of growth in the UK economy, though the potential for contractions in Production and Construction risk destabilising growth
Source: Office for National Statistics
Despite the contraction in financial services, last week also saw the release of the Bank of England’s Financial Stability Report in which it laid out its assessment of the health of the UK banking system. Going further than it has before in previous scenario analyses, the Bank said the UK banking system would be resilient to the financial impact of a worst-case disorderly withdrawal from the European Union occurring at the same time as a global trade war involving 25% tariffs on US-China trade, and a 30% drop in the US stock market. However, the Bank made clear that such a shock would deliver material disruption to the economy as a whole.
With the Conservative leadership election currently in play, there has been significant discussion in recent weeks as to whether each of the candidates would deliver a “no-deal Brexit” as a last resort. This was reflected in the Bank’s report as it noted “the perceived likelihood of a no-deal Brexit has increased since the start of the year”. The Bank went on to say that though a disorderly Brexit carried its own material economic risks, there had been “some improvement in the preparedness of the UK economy for no-deal”.
Chart 2: As a no-deal exit from the European Union has once again taken hold of headlines, sterling has retreated from its gains earlier in the year
With commentators effectively united in agreeing Boris Johnson will win the leadership election, the question falls as to who he will select to lead re-negotiation attempts with the European Union. Whether the European Union will entertain fresh negotiation attempts is another question. Welcome back to Groundhog Day.
THE WEEK AHEAD (G7 + China)
Monday: China Q2 GDP, China Industrial Production, China Retail Sales, China Fixed Asset Investment, China Industrial Capacity Utilisation
Tuesday: Italy Balance of Trade, UK Unemployment Rate, UK Average Earnings, Eurozone Balance of Trade, Germany ZEW Economic Sentiment, Italy Inflation Rate, US Retail Sales, US Industrial Production, US Manufacturing Production, US Capacity Utilisation
Wednesday: UK Inflation Rate, Eurozone Inflation Rate, Canada Inflation Rate, US EIA Crude Oil Stocks
Thursday: Japan Balance of Trade, UK Retail Sales
Friday: Japan Inflation Rate, Eurozone Current Account, UK Public Sector Net Borrowing, Canada Retail Sales, US Michigan Consumer Sentiment
STAT OF THE WEEK: 61.76 and 56.89 – estimated terawatt-hours of electricity used by Bitcoin and Greece per year respectively (University of Cambridge).
Data correct as at: 12/07/19