20th June 2017

My kingdom for a horse

Two months ago, Theresa May announced a snap election to make hay while her popularity was riding high. “Division in Westminster” was curtailing the Government’s ability to drive a hard bargain for a Brexit deal, the Prime Minister said.

Pundits predicted a Conservative landslide that would net Mrs May’s party 56 more MPs. Instead, the election delivered a hung Parliament. Mrs May had yet to formally cement a new Government as Brexit minister David Davis travelled on Monday to Brussels to open formal negotiations with his European Union counterpart, Michel Barnier. The hard Brexit stance has become increasingly untenable in recent days. In an interview with the BBC, Chancellor Philip Hammond contradicted one of his boss’s mantras, saying no deal would be a “very, very bad outcome for Britain”.

Mrs May’s “no deal is better than a bad deal” and “strong and stable” have been shown to be myths. Meanwhile, London has been seething about the Government’s response to the Grenfell tower tragedy. Austerity, the keystone of UK political discourse for the better part of a decade, is now a toxic term.

So where from here? Greater fiscal spending and more regulation wasn’t what the Government campaigned on, so how they will proceed is difficult to know. While the Tories may want to avoid the distractions of a fresh leadership contest, a lot can happen in a short space of time in UK politics these days.

Source: FE Analytics, data sterling total return to 16 June

Ebb and flow

As the strength of the UK Government has melted away during a scorching heatwave, France is set to deliver its fledging moderate President the largest post-war majority in the National Assembly.

French premier Emmanuel Macron’s new party, En Marche, has a strong mandate for labour market reforms and other changes, albeit from a very low turnout. (This could involve a bitter fight with the unions though.) Europe, more widely, has been showing signs of a sustained recovery, leading the Euro Stoxx equity index to outperform over the past few months. Added to this, the European Union agreed on an €8.5bn (£7.4bn) bailout for Greece. Markets have been unmoved by the Greek situation for some time now, and the latest deal was greeted by similar indifference. You may have missed reports of it. The IMF is not involved in the payments because debt relief has still not been sanctioned. However, the EU said it will be on the table during the next round of talks.

In contrast, the UK’s major health measures have continued to dip. UK property website Rightmove revealed nationwide asking prices had fallen in June for the first time since 2009. Inflation continues to rise, further eroding consumer buying power. UK retail sales growth was weaker than expected in May, rising just 0.9%. In response, the retail-heavy FTSE 250 slumped 2.1% on Thursday, its largest daily fall since last summer.

The Bank of England is not immune to rising prices. Despite shaky numbers from consumption, wages and property, three Monetary Policy Committee members voted to raise interest rates last week. It’s the first time so many votes have been cast for a hike since 2011. They were of course defeated 5-3, so rates remained at the record low of 0.25%. One of the dissenters, Kristin Forbes, leaves the committee this month and it won’t be hard to find someone more dovish. Also, the committee is a member down because of Charlotte Hogg’s resignation following a conflict of interest error. This seat is usually held by someone with less experience of monetary policy, so is traditionally seen as a safe vote for the Governor. The doves seem still very much in control of the UK’s central bank.

I came, I saw, I conquered

As expected, the US Federal Reserve raised its benchmark interest rate by 0.25 percentage points last week. Many believe this will be the Fed’s last hike of 2017 because of falling inflation and softer economic data; however, the central bank continues to forecast one more 25-basis-point increase.

This uncertain economic climate was shrugged off by e-commerce titan Amazon, which paid a 27% premium to buy up-market grocer Whole Foods for $13.7bn (£10.7bn). The unexpected expansion of Amazon’s food business (it has a distribution deal with Wm Morrison in the UK) caused capital flight from retailers around the world. Walmart slumped 6%, Tesco fell 5%, Sainsbury’s 4%. Morrison’s rose, potentially because it’s seen as a takeover target if Amazon wants to make landfall in the UK.

Amazon has conquered all it has met during a meteoric rise from online bookseller to all-pervasive e-commerce leader and cloud computing mammoth. Now it is going head-to-head with some of the world’s largest and most entrenched businesses on their home turf. You could say this is a grand field experiment of Amazon Go’s automated stores, a technology that it has been honing in secret for some time.

Investors seem to be backing the barbarian at the gates rather than the besieged supermarket chains. Whatever the result, it will take years for the battle to resolve. And if Amazon’s record is anything to go by, it is likely to drive fundamental changes in the supermarket industry.

Bonds

UK 10-Year yield @ 1.02%

US 10-Year yield @ 2.15%

Germany 10-Year yield @ 0.28%

Italy 10-Year yield @ 1.99%

Spain 10-Year yield @ 1.46% 

Julian Chillingworth
Chief Investment Officer

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