Chief Investment Strategist
Market Overview, Alan McIntosh
Theresa May’s failure to get EU backing for the Brexit “Chequers option” at last week’s Salzburg summit hit sterling on Friday. The UK FTSE 100, with its large proportion of international companies, rose by 1.7% on the day, while the more UK-centric FTSE 250 was ahead by only 0.2%. The main beneficiaries were Oils and Mining shares, both major dollar earners. Although it is too early to predict what the Brexit outcome might be, it seems likely that a “no deal / hard Brexit” scenario could put further downward pressure on the pound. If one casts one’s mind back to the referendum on EU membership in 2016, the unexpected vote to leave saw the pound fall by around 10% in the immediate aftermath. It is reasonable to expect a similar reaction should we get to next March’s deadline with no agreement in prospect.
Elsewhere, the US stock market hit new all-time closing highs as measured by the Dow Jones Index and S&P 500. The positive confluence of tax cuts, strong economic growth, and sharply rising corporate earnings (all linked of course) have kept investor interest aloft, particularly as many other regions, such as Emerging Markets, have recently experienced problems of their own. Given the exceptional returns obtained from US stocks, however, we are prompted to take a bit of profit into this strength.
Economic Overview, Richard Carter
Brexit talks ran into trouble last week following a fractious summit in Salzburg. The level of uncertainty remains extremely elevated amid all the talk of second referendums, general elections and Canada-style free trade deals. However, the key focus of the negotiations is still the Irish border backstop as agreement on that would open the path to a deal even if the details of the future relationship are left vague.
Remarkably, the UK economy seems to have performed quite well over the summer judging by the latest retail sales data. Inflation also picked up noticeably in August to 2.7%, but most economists see this as a blip rather than the start of a new trend. CPI is still expected to fall to around 2% by year-end as the impact of Sterling’s depreciation gradually unwinds. Otherwise, investors understandably continue to worry about the impact of the US-China trade war but we are yet to see much impact in the economic data.
This week, the Federal Reserve will respond to the strength of the US economy by raising interest rates to 2.25%, an outcome that is already discounted in markets. US durable goods are also out before the Conservative Party conference kicks off on Sunday with Theresa May hoping for an improvement on last year’s debacle.
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.