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Weekly comment: 09.07.2018

Market Overview, Chris Beckett

The last week has all been about political non-events (and the World Cup). Both trade disputes and Brexit politics have created a lot of noise but have had little impact on markets with the FTSE 100 opening this week very marginally below where we closed a week ago. This is not to say that either subject is not important with significant implications for economic progress and future market levels, but that recent events have not given any additional clarity on either subject. Equity markets are very efficient in discounting future expectations but we are no closer to knowing what scenarios we should be discounting.

Trade disputes, initiated by the USA, can be seen as a combination of domestic positioning ahead of the mid-term elections and a negotiating trap laid by President Trump designed to provoke a counterproductive response by foreign governments. Despite multiple ministerial resignations over the UK’s Brexit position we are no close to knowing the form of Brexit to expect, or even if it will happen. If anything, all that has changed is that a reasonable compromise is less likely. It is appealing to think that the markets’ attention will turn to fundamentals as the second quarter earnings season begins, but with news of Boris Johnson’s resignation breaking whilst I have been writing this it is probably too much to ask.

Economic Overview, Richard Carter

Another week, another political crisis in the UK. Theresa May’s new soft Brexit strategy, agreed at Chequers on Friday, has been undermined already after David Davis resigned from the Cabinet. He also roundly criticised her negotiating strategy in his resignation letter, claiming it will not deliver on the mandate given by the result of the referendum.

What happens now is anyone’s guess but it seems likely that Theresa May will persist with her new strategy and will therefore face a leadership challenge from the Tory Brexiteers led by Jacob-Rees Mogg. If she faces them down, then a very soft, Norway-style Brexit is in the offing. If she loses, a hard Brexit or possibly a general election would seem likely. So far, markets have reacted quite calmly to the news but will be closely watching the reaction of other senior Cabinet ministers.

From an economic perspective, the situation is increasingly absurd – we are 8 months away from leaving the EU and the government cannot agree what it wants from Brexit. They are disagreeing not over minor details, but fundamental questions about the future direction of the country and the economic relationship with our biggest trading partner. While Mark Carney was talking up the UK economy last week and markets are still cautiously pricing in a rate hike in August, this could easily be overtaken by events.

Elsewhere, the economic news has generally been pretty good in most parts of the world although the increasingly hostile trade rhetoric is a cause for concern. This week, US inflation numbers will be released alongside UK monthly GDP numbers.

Investors should remember that the value of investments, and the income from them, can go down as well as up. You may not recover what you invest. This commentary has been produced for information purposes only and isn’t intended to constitute financial advice; investments referred to may not be suitable for all recipients. Any mention of a specific security should not be interpreted as a solicitation to buy or sell a specific security.

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