11th February – 17th February 2019

Front and centre of our thoughts this week include

Out with the old, in with the new…Chinese year. Although it may feel a little bit like groundhog day as US-China trade negotiations resume this week with senior officials from the US travelling to China in order to find some sort of compromise. News reports suggest that it is unlikely US President Donald Trump and Chinese President Xi Jinping are to meet prior to March 1st when the next set of tariffs are due to be implemented following the 90-day truce set by the two leaders. In any case expect any soundbites to come out of the current set of discussions to be highly market sensitive.

The POTUS twitter account will likely come under heavy usage this week, particularly as Donald Trump and congressional lawmakers have until Friday to agree on a budget deal that would avert another partial shutdown of the federal government. The last episode in January looked like a classic case of ‘kicking the can down the road’, this week Republicans and Democrats will (again) need to resolve their differences over the funding of the now infamous $5.2bn wall otherwise the US will face another government shutdown.

A busier week than last for economic data with many in the market focused on the release of Q4 GDP data for Germany later this week. The economic powerhouse of Europe has struggled for momentum over the last six months, first issues with car production following new emission testing requirements then the drying up of the Rhine caused issues for both chemical and manufacturing companies last year. Growth in Q3 was negative at -0.2% and expectations for Q4 are for a miserly +0.1%. Should this data release come out lower (and indeed negative) it would represent a technical recession for Germany.

US inflation typically garners a few headlines upon release. This is principally because, at this point in the economic cycle, monetary policy is so heavily linked to the direction of short-term inflation. Again the consensus is for a 0.2% month-on-month reading and we do not expect any material divergence. Should the number be far lower, investors may start to price in the US Federal Reserve pausing for even longer before they raise interest rates again. UK inflation is also released this week with expectations of a small rise in core CPI to 2.1%, for the year-on-year reading.

Going on in the engine of Brexit

Another Brexit dominated week in store at Westminster after ‘some’ respite last week. So, briefly, what is the chain of events for this week? Today sees UK Brexit secretary Stephen Barclay arrive in Brussels to negotiate with Michel Barnier over new alternative arrangements for the current Irish backstop, which prevents a hard border. Should there be no changes agreed by Wednesday Theresa May is expected to issue a “neutral motion” for debate on Thursday, at which point a series of amendments will be put forward.

Thursday is being dubbed as the “Massacre on St.Valentines Day” when MPs have the chance to guide the Prime Minister towards a satisfactory Brexit deal for all or deem it more important that Parliament take over the process. The latter outcome would severely scupper whatever chance there was of concluding a deal by March 29th.  Weekend press reports suggest if there is no meaningful vote by February 27th the PM will allow Parliament to vote on alternatives. With 46 days to go we are clearly going to the wire on this.

In the rear view mirror of last week we saw

The Bank of England’s monetary policy meeting took place amongst what they describe as the ‘fog of Brexit’. They indicated that interest rate rises were unlikely in the backdrop of the current political climate, especially in a no-deal scenario. Whilst matters are finely balanced, the Bank is following the form of other central banks who have recently guided markets towards a scenario of, effectively, zero rate rises in the coming quarters. 

This morning saw the release of Q4 GDP for the UK where growth was weaker than forecast at 0.2%, having been 0.6% in the third quarter. As has been the case since June 2016 the slowdown in economic growth has been driven by a fall in business investment, indeed this has now been outright negative for the past four quarters – the longest continual decline since the 2008 financial crisis. The UK economy is set for its worst year of growth since 2009 with financial commentators warning of a recession should Britain crash out with no deal.

If the domestic economy wasn’t enough of a worry, our largest trading partner – yes, Europe - is also suffering with weaker growth which is curtailing demand for British exports which detracted 0.12% from Q4 GDP. Last week the European Commission released lower growth forecasts for Eurozone countries with German growth (as measured by GDP) forecasted to be 1.1% for the year, down from 1.8%. Regional forecasts were revised lower (on aggregate) from 1.9% to 1.3%.

In the side view mirrors of corporate activity we notice

The corporate earnings season in the US has breached the half way point with another 63 companies in the S&P500 to report this week. In Europe and the UK, who typically report far later after the quarter end, the figure is nearer 25%. For US corporates, earnings have beaten estimates but these expectations were already quite low following the violent sell-off of last year and the roll-over from the Trump tax bump. 

This week sees soft drinks giants, Pepsi and Coca-Cola report results in the US. Both businesses have been involved in M&A activity over the past year and analysts will be watching to see how the integrations have taken place. In Europe, household names like Heineken and Nestle report while RBS will be the first of the UK high street banks to report on Friday.

Source: Bloomberg. Figures are for the period 4th February to 8th February 2019.
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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