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Weekly Comment: 28.01.2019

Market Overview, Chris Beckett

In the UK most people’s attention this week will be on the Brexit debate in parliament. A range of backbench amendments that are expected to come to the vote on Tuesday have the potential to provide a little bit of clarity to a process that has had far too little; by demonstrating what is unacceptable to parliament, and more importantly, what might be Theresa May’s negotiating position with Europe and her own party. Over the next few weeks the 27 remaining countries in the EU are likely to be presented with a choice of agreeing to changes to the Irish backstop or being held responsible for a disorderly exit. This scenario for a softly negotiated Brexit is why sterling has strengthened and domestically focused stocks have enjoyed a strong start to the year, with more to go if the above sequence of events plays out. However, uncertainty will persist through the trade negotiations which will follow any negotiated withdrawal agreement.

Elsewhere, attention will move from the US government shutdown (with the can kicked down the road for three weeks) to an accelerating earnings season. So far 16% of large US companies have reported year-end financial results but a further 34% will report this week. Generally, 62% of companies that have reported have beaten market expectations on sales, and 75% have beaten market expectations on profits; although these expectations have been falling steadily since October. The most positive news is coming from healthcare, industrial and financial companies, with commodity related stocks lagging as investors adjust to lower oil and metal prices. Any reason for investors to focus on the profits and cash flows of actual companies (which generally look positive) gives us a potential respite from the macroeconomic and political driven weakness of recent months.

Economic Overview, Richard Carter

Political dysfunction in the US is taking a short vacation with the end of the government shutdown although none of the underlying issues on immigration have been resolved. However, it will allow the focus to switch back to the economy with a plethora of data likely to be released this week, including retail sales, Q4 GDP numbers and nonfarm payrolls. The Fed also hold their latest meeting although no interest rate hike is expected for the next couple of months at the very least. There are also fairly high-level talks taking place between the US and China on trade. These are potentially important for the global economic outlook this year but probably the best we can hope for is that the two sides agree to continue negotiating rather than resort to more tariffs.

Investors should remember that the value of investments, and the income from them, can go down as well as up. Investors may not recover what they invest. Past performance is no guarantee of future results.

Any mention of a specific security should not be interpreted as a solicitation to buy or sell a specific security.

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