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Electoral Swings

07 Dec 2016

Jack Turner, Research Analyst

This edition covers the Richmond Park by-election, the latest UK economic data, the Italian Referendum and the latest Trump Twitter storm.

ELECTORAL SWINGS

 

Electoral Swings

The Richmond Park by-election could cause concern for the Conservative Government following a 22% swing in votes from the Tory-leaning ‘independent’ Goldsmith to the Liberal Democrat’s Olney. This beat a similar swing in the Witney by-election.

 

Goldsmith had prompted the vote having resigned over plans for a third runway at Heathrow, but he was also a Brexiteer – a stance that was at odds with a constituency that is estimated to have seen over 72% vote Remain. While ministers dismissed the result, it could ensure MPs pause for thought when considering their future.

 

NEWS

 

UK SERVICE SECTOR STRONG

Growth in the UK service industries in October continued to strengthen according to a the IHS Markit/CIPS purchasing managers' index. The expansionary figure of 55.2 is up from 54.5 in September and is the highest figure since January. The sector accounts for about 80% of the UK economy and, when combined with last week’s manufacturing and construction sector surveys, indicates that the economy as a whole will grow by 0.5% in Q4 2016, the same rate as Q3. The survey also found that employment growth in the service sector hit its fastest pace since April.

 

ITALY VOTES NO

While the result from 4 December was expected, the margin was not. With most ballots counted as of writing, the No vote led with 60% versus 40% for Yes, with a 70% turnout. The result led the Italian Prime Minister Matteo Renzi to resign and potentially prompt a general election unless the caretaker government can hang on until spring 2018, the pre-agreed date for Italy’s election. Any election could see the Five Star Movement gain seats although their leader, Beppe Grillo has a criminal record which makes him by his own rules unfit for the office of Prime Minister.

 

TRUMP’S TWITTER TANTRUM

President-elect Trump’s latest tweets have caused consternation in diplomatic circles. Fresh on the back of a much-hyped suggestion that Nigel Farage replace Kim Darroch as the UK ambassador to the US, Trump ruffled feathers with a series of comments on trade with China and activity in the South China Sea. Given Republicans had spent the weekend downplaying Trump’s unprecedented call with the Taiwanese President, the incident again underscored the novice status of a reality TV personality who has never held public office and who has no foreign affairs nor military experience.

 

PORTFOLIO ACTIONS

 

Our core view is that interest rates will move higher, and, as a result, 7IM’s funds are generally short in terms of fixed income duration. This leaves a risk if interest rates start to fall again.

 

To provide some insurance against US rates falling back to levels seen in the summer, we decided to buy tail risk protection notes. The payout is very similar to the equity option strategy that we traded in the summer and which remains in place until June 2017 if markets fall. At maturity in September 2017, we would receive a payout if 10 year US swap rates are below 1.60% in all the portfolios apart from the two most adventurous.

 

In the event of a trigger, it would not protect all of the portfolio, but would provide a meaningful defence against falling rates.

 

THREE ANNOUNCEMENTS DUE THIS WEEK

06 December – US Balance of Trade // 08 December – ECB Interest Rate Decision // 09 December UK Balance of Trade

Before you go

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SOURCES: BLOOMBERG; 7IM

The value of your investments and the income from them may go down as well as up, and you could get back less than you invested.
The value of your investments and the income from them may go down as well as up, and you could get back less than you invested.

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