10th December – 16th December 2018

Front and centre of our thoughts this week include

Investors are waiting anxiously in hope for this year’s “Santa Rally” to arrive, with equity market rallies of late struggling to find legs. It’s difficult to know if this week will provide the tonic markets desire, with US-China trade tensions and the UK parliamentary vote likely to continue to weigh on investor sentiment. Whilst politics is likely to take the bulk of the headlines, it’s also a busy week on the economic front with China releasing a number of key economic indicators for November and the European Central Bank (ECB) holding its last monetary policy meeting of the year.

Ever since the trade war with the US started, Chinese economic data has come increasingly under the spotlight for signs of any negative impact of tariffs on growth. Over the weekend, both import and export data for November disappointed which only adds to the concerns over the outlook for the Chinese economy. This week provides further insight into the effectiveness of recent government policies to stimulate economic activity with the release of retail sales, fixed asset investment and industrial production figures for November. A stabilisation in the data could give the Chinese government some confidence that their policies are starting to take effect, however further weakness could prompt a fresh round of stimulus.

The ECB holds its monetary policy meeting on the 12-13th December and given recent communication from policymakers it is widely expected that they will confirm the end to their quantitative easing (bond) programme by the end of the year. Given the near certainty of this outcome, the most interesting aspect of this meeting will be the bank’s new economic forecasts for the bloc, particularly in light of the recent weakness in economic activity, especially from the region’s largest economy Germany. Investors will also be hoping for further details on a potential new targeted longer-term refinancing operations (TLTROs), which if announced may be viewed as the bank starting to shift away from monetary policy as a tool to stimulate growth, an outcome which could be marginally negative for European bonds.

Elsewhere, in the UK we see the release of employment data for October, with wage growth in focus for signs of inflationary pressures building within the labour market. While in the US, retail sales figures for November are released, which will provide important clues into the health of the US consumer and the success of the Black Friday/Cyber Monday sales.

Going on in the engine of Brexit

The Brexit process appears to be reaching a pivotal and decisive juncture with parliament set to vote on Theresa May’s Withdrawal Agreement on Tuesday at 7pm. However, with less than 36 hours to go until the vote, it’s still not certain if it will go ahead.

So convinced that Mrs May’s proposal will suffer a heavy defeat, cabinet ministers have been pressurising the prime minister to postpone the vote. Parliamentary procedure gives the prime minister until Tuesday morning to do so. However, should she decide to go ahead with the vote, which is the current message, and suffer a devastating defeat, then it’s unclear what direction the Brexit process takes from that point –  a resignation from the prime minister, a leadership challenge, a vote of no-confidence in her government or even a second referendum are all viable possibilities. 

It is difficult to know how markets will react in any of these scenarios, however Sterling, which has been a barometer of the confidence in the Brexit process since June 2016 has weakened slightly this morning, suggesting some of the uncertainty is in the price. Nevertheless, expect further weakness in the currency if the UK political landscape is thrown further into chaos later this week.

In the rear view mirror of last week we saw

It was another difficult week for equity markets. The positive tone in markets from the trade truce between Washington and Beijing from the G-20 meeting didn’t last long. Optimism around the deal started to fade when investors questioned if the 90-day truce was enough time for both sides to overcome their significant trade differences. President Trump tweeting that he is a “Tariff Man” if negotiations failed only soured sentiment towards the deal. Further adding to the concern over the stability of the truce was the arrest of Huawei’s chief financial officer in Canada for alleged violations of Iranian sanctions.

Huawei is seen by the Chinese government as a national technology champion, and Chinese officials have questioned the legitimacy of the arrest. However, western governments have been cautious on the company for a while with the US, Australia and New Zealand all blocking the use of the company’s 5G telecoms equipment on security grounds.

Political development aside, it was a mixed week in regards to economic data. The Chinese service sector PMI and both the US manufacturing and service sector ISM confidence surveys were stronger than expected. The positive rise in business confidence should alleviate some of the concerns over the near-term outlook for the global economy. However, whilst the confidence readings positively surprised, the US employment report for November disappointed. The US economy created fewer jobs than expected in November and the pace of wage growth remained the same at 3.1% year on year.

In other news, OPEC members agreed on Friday to cut oil production by 1.2 million barrels per day from October 2018 production levels. The production cuts will start in January and last for an initial six month period, with OPEC members agreeing to review the agreement again in April 2019. The price of oil rose after the announcement.

In the side view mirrors of corporate activity we notice

In a further sign that the US housing market is starting to slowdown, Toll Brothers, a homebuilder focused on affluent consumers reported its first drop in orders in four years. The company said orders in the three months to the end of 31st October dropped by 13 per cent against expectation of a 6.5 per cent rise. The company attributed the decline to the cumulative impact of rising mortgage rates and consumer concerns over a housing slowdown. However, the announcement followed similar guidance from a number of its main competitors, with the housing market continuing to remain a weak spot in an otherwise relatively strong US economy.

Shares in travel operator, Thomas Cook, took another nosedive last week after the company issued its third profit warning of the year. Shares in the company have now fallen by over 75% from their May 2018 peak and remain at the lowest levels since 2012. The company blamed a fall in profits on consumers delaying booking overseas holidays due to the heatwave experienced in the UK last year. However, the company has also not been helped by a shift in consumer behaviour, with holidaymakers preferring to use the likes of AirBnB and Ryanair to put together their own holidays, rather than buy traditional packaged deals.

Source: Bloomberg. Figures are for the period 3rd December to 7th December 2018.
Where the index is in a foreign currency, we have provided the local currency return.

The above chart provides the performance for the three developed market geographies where the TMWM MPS portfolios maintain their largest exposure. All investments and indexes can go down as well as up. Past performance is not a reliable indicator of future performance.

Opinions, interpretations and conclusions expressed in this document represent our judgement as of this date and are subject to change. Furthermore, the content is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or a solicitation to buy or sell any securities or to adopt any investment strategy. This note has been issued by Thomas Miller Wealth Management Limited which is authorised and regulated by the Financial Conduct Authority (Financial Services Register Number 594155). It is a company registered in England, number 08284862.

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The value of your investment can go down as well as up, and you can get back less than you originally invested. Past performance or any yields quoted should not be considered reliable indicators of future returns. Prevailing tax rates and relief are dependent on individual circumstances and are subject to change.

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