This week’s update sees some information on the initial phase of the Brexit negotiating process, the likely impact on Sterling and how the investment team has positioned portfolios accordingly. Also covered is the recent news on UK retail sales, US existing home sales and Germany’s latest consumer confidence numbers.
ARTICLE 50 TRIGGERED
Theresa May will trigger Article 50 on 29 March with a letter to the EU that sets out the key UK priorities. The EU will acknowledge the letter and then, over the next month, sets out to finalise its negotiating guidelines. This process mainly involves the ‘sherpas’ – the personal representatives of key heads of government – who will draft detailed positions for the EU to formally agree by the end of April. The process is likely to lead to negative news headlines given there is no role for the UK within the process and no option to sway the rhetoric.
UK RETAIL SALES PUBLISHED
According to the Office for National Statistics (ONS), retail sales in the UK posted a 1.4% month-on-month increase in February, but fell by 1.4% in the three months leading up to February. This was steeper than the 0.5% drop in the three months leading up to January and the largest decline since March 2010. The ONS stated that the decrease in sales figures was likely due to rising petrol pump prices which were 18.7% higher than in February 2016, and had had a particularly large effect in the previous three months. However, the 1.4% monthly increase was 1% higher than consensus expectations, which was encouraging for future economic data releases.
US EXISTING HOME SALES FALL BACK
The resale of homes in the US fell by 3.7% in February. This was more than the 2.0% that was expected amid a continued shortage of housing stock on the market that is pushing up prices beyond the means of many potential buyers. Prices have now risen for 60 consecutive months, while the housing inventory has dropped for the 21st straight month year-on-year.
MIXED SIGNALS FOR GERMANY’S CONSUMERS
The March figures for consumer sentiment in Germany, as measured by the GfK, sent mixed signals to the market. While economic expectations and the propensity to buy picked up again after the February decline, income expectations fell back slightly given local inflation is now 2.2%, and some headline hitting price rises have negatively affected consumers. Meanwhile, because the propensity to save also rose again in March, the consumer climate prognosis in April is 9.8 points, slightly lower than the 10.0 points in March. Despite this news, however, GfK reported that consumers remain “on a shopping spree” given, in comparison to the past, consumer sentiment continues to be at high levels.
We believe that triggering of Article 50 is likely to lead to a slight drop in the value of Sterling despite the well publicised nature of the move and could even lead to new lows in the value of Sterling. This weakness is expected to continue given that April sees the EU being able to take the lead position for the Brexit negotiations and since this year’s macroeconomic data has not been as strong as 2H 2016.
Ahead of this, the team has cut the allocation to Sterling by a significant margin – nearly 8% in the Balanced strategies. The extent of the UK’s current account, additional complexity around Scotland's independence appeals and a realisation that we do not have a strong negotiating position may mean that the Sterling:US Dollar exchange rate could even be as low as £1:$1.10.
THREE ANNOUNCEMENTS DUE THIS WEEK
30 March – Eurozone Business Confidence // 30 March – Final US Q4 GDP Growth // 31 March – Final UK Q4 GDP Growth
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SOURCES: EURASIA, BLOOMBERG, 7IM