ONE MONTH TO GO TO DUTCH ELECTIONS
With a month to go until the Dutch general election on 15 March, the one member Freedom Party (PVV) of Geert Wilders is on track to win over 20% of the vote or 30 seats in the Tweede Kamer (House of Representatives) according to the polls. This puts him ahead of the other two current coalition parties of the VVD (estimated to get 24 seats) and the PvdA (just 11 seats), and would usually be lining him up to take up the post of Prime Minister. However, the other 27 parties putting forward candidates for the election have said that they will not join him to form a government, leaving the future uncertain.
UK GDP FORECASTS SEE SPLIT VIEWS
In contrast to the Bank of England’s prediction, the European Commission (EC) is forecasting growth of just 1.5% in 2017 and 1.2% in 2018. These figures are also in line with those of the National Institute of Economic and Social Research. The Bank of England, however, has predicted 2% in 2017 and 1.6% in 2018. The EC also stated that it expects the Eurozone to grow faster than the UK, by 1.6% this year and 1.8% the next. These figures though all represent upward revisions from previous estimates e.g. in November, the EC believed growth of just 1% was possible. Expectations therefore may move higher still despite the uncertainty over Brexit.
GERMAN TRADE STRONG
Germany's trade surplus reached €252.9bn in 2016, an all-time high. According to its Federal Statistics Office, German exports climbed 1.2% to €1.2tn in 2016, while imports rose 0.6% to €954.6bn. The figures come just days after Trump’s trade negotiator, Peter Navarro, told the newspapers that Germany was using the European Central Bank (ECB) to keep the Euro low and gain a price advantage over rivals. Germany and the ECB both refuted the claims, with the ECB making it clear that many Eurozone countries were still struggling.
NEGATIVE US TRADE BALANCE NEWS
Rhetoric over trade balances is only likely to intensify as the latest statistics published showed that the US trade deficit deepened slightly to US$502.3bn for 2016, a level not seen since 2012. The deficit in December fell 3.2% to US$44.2bn according to the Commerce Department. The gain in exports of commercial aircraft, heavy machinery and autos offset a rise in imports, but not enough to start to reduce the import-export gap. The whole year saw an increase in the deficit of 0.4%. Trump has pledged that the US should have a positive trade balance.
We have reduced our high yield bonds and Gilts allocations. We had sold most of our Gilts in July 2016 at a yield of around 0.6% following Brexit. By December yields were at 1.5%, which led to our process highlighting Gilts as being the most appealing conventional fixed income asset class and so purchased a 2% position in the 10 Year Gilt across the lower risk portfolios. With interest rates perhaps moving up, we have cut this allocation and taken profits. In the high yield space, the index has risen strongly on the back of positive sentiment and yields are falling sharply. While we still believe in some positive expected returns, the extreme under-pricing is no longer so obvious. We therefore trim back around a third of the position, which still leaves us overweight versus our Strategic Asset Allocation, but far less so than before.
THREE ANNOUNCEMENTS DUE THIS WEEK
15 February – UK Unemployment Rate // 15 February – US Rate of Inflation // 17 February – UK Retail Sales
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SOURCES: BANK OF ENGLAND, BLOOMBERG, 7IM