So this week’s one-pager focuses on governments’ shift from monetary policy to fiscal policy, UK retail sales, more good US data points and the start of the French election campaign.
NEW FOCUS FOR GOVERNMENTS?
The shock of first Brexit and now Trump may push governments to realise that a shift in policy is needed in order to help keep them in power. But the timing could possibly not be worse for bond investors. Already having seen a year’s worth of gains disappear in less than a month, the end of Quantitative Easing could also spell the end of the role of bonds as a safe haven.
UK RETAIL SALES COME IN STRONG
UK retail sales were surprisingly strong in October with the Office for National Statistics figures showing a 1.9% increase in volume month-on-month, well above the consensus of 0.5%. The year-on-year growth rate picked up to 7.4%, well above the consensus of 5.3% and marking the highest rate of growth since April 2002. The surge is mainly due to a rebound in clothing purchases despite an unusually warm September, supermarkets benefitting from Halloween and strong online sales.
US DATA POINTS TO RATE RISE
US jobless claims fell 19,000 to 235,000, well below the consensus 257,000 and a new 42 year low. Claims have now been below 300,000, a threshold associated with a healthy labour market, for 89 straight weeks, and a 9-year high. October housing starts (i.e. new home construction) rose 25.5% to 1.3mn, well above the consensus of 1,16mn. These numbers continue the trend in strong US data that has been seen recently. Alongside the perceived inflationary Trump policies in the pipeline, they underscore why the probability of a Federal Reserve rate hike in December now stands at 98%.
FRENCH ELECTIONEERING STARTS
Former French Prime Minister, François Fillon, topped the first round of the centre-right presidential primaries by a significant margin, promising economic reforms and hawkish stances on security and social values. He is now expected to beat Alain Juppe in the second round next Sunday. The real risk in the eyes of markets is the rise of Marine La Pen as a Presidential candidate. However, Fillon has been given a 70% probability of beating the Front National candidate.
The US election is of interest to 7IM investors as it highlights the extent of the performance differential between sectors. Traditional volatility indicators such as the CBOE Volatility Index are dropping, while the S&P is experiencing relatively benign moves given the election result. Much more is going on below the surface. While financials – to which 7IM increased exposure post-election – have done well (up 11.1%), utilities have underperformed (-5.2%). Some of 7IM’s portfolios have also benefited this year from different levels of sector and stock volatility through exposure to a ‘dispersion’ strategy. This looks to capture directly the difference between the index and index constituent volatility, and can act as an attractively-priced diversifying investment, which tends to move up in value when traditionally risky investments are declining.
THREE ANNOUNCEMENTS DUE THIS WEEK
23 November – US FOMC Minutes // 23 November – EU Composite PMI // 25 November – US Composite PMI
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SOURCES: BLOOMBERG; 7IM