This week we cover the US election result, the impact on markets and the latest UK data on both the balance of trade and the construction industry.
Markets were shaken around the world as Trump emerged victorious from the most divisive US election in modern history. Following the result in the early hours of Wednesday, global financial markets sold off with Gold and Yen surging. However, after a measured victory speech by Trump, markets rebounded as investors re-evaluated the damage the new President could do. With Congress on side, rhetoric could become policy but that takes time.
A rout in global bond markets following the Trump victory pushed yields higher. On Monday morning, sovereign bonds extended their record debt sell off, lifting the 30 year Treasury yield above 3% for the first time since January 2016. The bond sell off was driven by the President-elect’s pledge to boost infrastructure that, in turn, would lead to higher interest rates as inflation and economic growth pick up.
UK TRADE DEFICIT NARROWS
Britain's trade deficit with the rest of the world narrowed in the three months to September, offering a boost to Q3 GDP growth – much needed after the hefty fall in Sterling following Britain's vote to leave the European Union. The deficit in goods alone narrowed to £33.2bn from £34.7bn in Q2, but, for September, it widened to £12.7bn from a revised figure of £11.1bn for the previous month. There was also a widening of the deficit with the EU which came through despite Sterling’s weakness during the period.
UK CONSTRUCTION STILL A CHALLENGE
UK construction output rose by 0.3% month-on-month in September, better than the no change consensus. The downturn in construction output in Q3 is shallower than the Office for National Statistics initially estimated, but the sector still faces severe challenges. Construction output is now estimated to have fallen by 1.1% quarter-on-quarter, although that is better than the 1.4% decline that underpinned the Q3 GDP preliminary estimate. The outlook for construction could brighten if the Chancellor reverses planned cuts in public investment in the Autumn Statement. However, the Brexit vote is still likely to weigh on sentiment.
With the Trump triumph weighing heavily on US Treasury positions, the team took the decision to half our already low exposure, especially since a further spike in bonds would be bad for investors.
On the equity side, meanwhile, we recognised the need to invest in stocks but were keen to avoid the S&P 500. The team therefore looked to invest in US Financials via futures. These should benefit from a Republican administration (given their history of lower intervention), and any promised fiscal stimulus would also bode well for lenders. Banks also do well in rising rate scenarios.
We also added a position in US mid-caps via the Russell 2000 index. In a world where President Trump is prioritising American jobs and growth, US companies should stand to do better.
THREE ANNOUNCEMENTS DUE THIS WEEK
16 November – UK Unemployment Rate // 17 November – UK Retail Sales // 17 November – EU Inflation Rate
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SOURCES: BLOOMBERG; 7IM