This week we look at the US government shutdown along with other news coming out the EU and UK. We also provide a portfolio update on our Sterling investments.
At midnight on Friday 19 January, lawmakers in the US had still failed to agree on the US government budget for the next month leading to a shut down of all non-essential federal services. This means that most staff in the departments of housing, environment, education and commerce will be on unpaid leave, as will half of treasury, health, defence and transportation department workers until the bill is passed. The impasse between the parties focuses on immigration, and none of the nine Democrats needed to pass the bill by its 60 votes are willing to cross the floor. The last government shutdown in 2013 lasted 16 days and cost the state US$2bn in lost productivity.
UK inflation remained largely unchanged as the figure dropped back by 0.1% to 3% for December. The fall – the first since June 2017 – was as a result of air fares, which rose again, but not by as much as the same period in 2016. A reduction in the price of toys and games also supported the small drop. The Office for National Statistics stated that it was too early to state whether this was the start of inflation trending lower. However, that could be the case as any increase in prices paid post the EU Referendum and the subsequent fall in the value of Sterling fall out of the annual comparisons.
The country’s centre-left Social Democrats (SPD) have narrowly voted in favour of starting formal negotiations with Angela Markel's conservatives at a special session on Sunday 21 January – a U-turn to their previous position where they would not re-join the government in a coalition. Talks are due to start on Monday 22 January, with a finish date set for the 12 February. If concluded, the 153 seats held by the SPD would combine with the 246 seats of the Christian Democratic Union and the Christian Social Union of Bavaria to provide a working majority of 44 seats. However, the deal will need to be approved by a postal ballot of the 440,000 members of the SPD so hurdles still exist to the deal.
The US government shut down may affect Donald Trump in more ways than at home given there is pressure for him not to fly to Davos, Switzerland, and join the next World Economic Forum should the shut down continue. Attending as the first sitting president since Bill Clinton in 2000, Trump was expected to highlight the strength of the US economy among the business, banking and political leaders, while also encouraging businesses to invest further in their operations in the US and take advantage of the deregulation Trump has planned and the tax cuts voted in at the end of 2017.
7IM’s portfolios are currently holding more Sterling denominated assets than our Strategic Asset Allocation sets out. This is because we believe that Sterling can rally against all currencies, particularly if Brexit related fears are allayed and because of its current low value. While much has been made of its recent performance against the US Dollar, the rise in value is less significant against other major currencies such as the Euro or Yen. This is because these currencies have held their value, where as the US Dollar has been weak over the last few months – weakness that looks set to continue. In January 2017, the Dollar Index reached 103.8, but over the course of 2017 declined and is now trading in the low 90s. Market expectations suggest there may be further weakness in the Dollar unless the recent tax cuts can boost productivity and growth as intended.
THREE ANNOUNCEMENTS DUE THIS WEEK
24 Jan – US Existing Home Sales (Dec) // 25 Jan – ECB Interest Rate Decision // 26 Jan – UK Q4 GDP Growth
SOURCES: BLOOMBERG, ONS, REUTERS, 7IM.
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