This week, we review the discussion to extend Carney’s Bank of England contract, flag three other pieces of news that are affecting financial markets and highlight three data points being published this week as 7IM begins tactical asset allocation discussions.
Talks are underway between the Bank of England and the Treasury to prolong the tenure of Mark Carney as governor of the central back beyond the June 2019 departure date that he set out in October 2016. The extension being sought is to June 2020, two less than the eight years that governors usually serve. The extra year would allow the Treasury to recruit a replacement with a view on the role after the Brexit negotiations would have been completed. The extension would also provide some continuity as the UK-EU negotiations progress.
UK manufacturing expanded at its slowest rate for 25 months and orders fell for the first time since April 2016, according to the latest Purchasing Managers’ Index (PMI). The monthly PMI from IHS Markitfell to 52.8 in August versus 53.8 in July. However, the numbers may be a symptom of global contraction in the sector rather than anything specifically related to Brexit and the value of Sterling. Commentators also cautioned that any number over 50 is still deemed to indicate an expansion, while anything below means a contraction, and also noted that the manufacturing sector ‘only’ makes up 11% of the UK GDP totals and so overall growth could still remain on track.
One of the biggest reshuffles in jobs among top EU officials is starting ahead of the 2019 voting. The largest number of jobs are set to change hands in the year, while the politics behind the appointments remains complex. New presidents will be needed for its four most important institutions: the European Commission; the European Council; the European Central Bank; and the European Parliament. In addition, slots for its foreign policy chief and Europe’s nomination for Nato’s secretary-general are up for grabs. The changes come at a time of considerable external pressure.
The US and Canada announced a five day break in in the negotiations to revamp the North American Free Trade Agreement (NAFTA) despite efforts by the Canadians who appear to be struggling to play catch up following the US-Mexico bilateral deal. The option for a no deal seems impossible to Canadians who send three quarters of their exports south – trade that supports about 2.5m Canadian jobs. Meanwhile there is a legal question whether Trump is actually able to only allow for a two-way, US-Mexico deal given the authority some believe has been handed down to him by Congress.
The team has begun its formal quarterly tactical asset allocation process to decide if portfolios will need to be revised based on the current economic and market conditions and the three to 18 month outlook for both. The process starts with a review of key world geographies, looking at economic, financial and political developments that could impact any asset returns over the coming months. The team then draws up a set of forward looking scenarios that are presented to the Asset Allocation Committee. This consists of the 7IM investment team and external representatives, who provide expert insight into economics, financial markets and politics. The team then assess the probability for each scenario, and then overlay these probabilities onto forecasted returns to produce any updates to the targeted returns for each asset class.
THREE ANNOUNCEMENTS DUE THIS WEEK
05 Sep – UK Services PMI (Aug) // 05 Sep – US Balance of Trade (Jul) // 31 Sep – EU Unemployment Rate (Jul)
SOURCES: BLOOMBERG, IHS MARKIT, REUTERS, 7IM
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