This week, we look at 7IM’s Brexit scenarios and review three other key pieces of the news out of the UK, EU and US. We also look at the latest stats out of Scotland.
Receipts from the increasing North Sea oil sales helped the Scottish government reduce the level of it’s fiscal deficit in 2017-18 from 8.9% of its level of GDP to 7.9%. However, the figure remains high and four times larger than the fiscal deficit for the whole of the UK, which is 1.9% of GDP. The numbers are released as part of the annual Government Expenditure and Revenue Scotland report, which is a closely watched as a potential fiscal starting point for an independent Scotland should there be another referendum.
The UK’s banks and building societies are loosening lending standards and cutting fees to maintain growth, as competition and a weakening housing market squeeze profit margins, with the number of deals willing to lend at least 90% increasing by a fifth over the last six months. Figures from UK Finance show that the number of mortgages approved for new house purchases dropped by 4.3% in July to 39,584 compared with the same month a year ago, despite the number of remortgages increasing ahead of the Bank of England decision to raise base interest rates in their August meeting. The number was also lower than June’s 40,300.
Speculation on who would success Mario Draghi as the president of the European Central Bank when he steps down next year has so far tended to focus on one man, Germany’s Jens Weidmann. However, Angela Merkel seems to be more set on securing the presidency of the European Commission for one of her country’s nations and as such has poured cold water on Wiedmann’s candidacy given Berlin cannot hope to secure the two key roles given the reaction that this would prompt from other EU members.
The US and Mexico are understood to have reached a breakthrough in the negotiations to revamp the North American Free Trade Agreement (NAFTA) in a move that is seen as the US looking to ease tensions with its more long standing allies ahead of any further confrontations with China. In announcing the deal, however, President Trump announced that the NAFTA name would be updated to the US-Mexico trade agreement and highlighted that he was prepared to sign a deal with Mexico alone, potentially sidelining Canada.
With the discussions about Brexit ongoing amid much more talk of a ‘no deal’ scenario coming to fruition, the 7IM investment team has provided an update on its latest views. Here, the team believe that there are three potential outcomes: a 75% chance of the Government kicking the can down the road; a 20% chance of a ‘no deal’; and a 5% chance of a ‘shock remain’ scenario. The team are using the scenarios to plan for reactions in financial markets and in particular plan how the FTSE 100 and the value of Sterling might react. Their base case suggests that we should look through the short term noise surrounding Brexit, but ensure that we continue to remain diversified globally with a third of our Balanced portfolios (as an example) allocated to non-Sterling. Meanwhile to balance out the view that Sterling may suddenly rally, we continue to hold options’ contracts.
THREE ANNOUNCEMENTS DUE THIS WEEK
29 Aug – US GDP Growth Q2 2nd Est. // 30 Aug – EU Business Confidence (Aug) // 30 Aug – UK Consumer Credit (Jul)
SOURCES: BLOOMBERG, FT, REUTERS, ONS, 7IM
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