28th January – 3rd February 2019

Front and centre of our thoughts this week include

It's an action packed week in financial markets, with investors set to be entertained by a busy corporate, economic and political calendar.

US-China trade negotiations enter a critical stage this week, with China’s vice premier, Liu He, scheduled to travel to Washington for talks with US trade representative, Robert Lighthizer. With the IMF recently warning that escalating trade tensions could undermine global economic growth, any signs of progress will be well received by investors. One of the key topics set to be discussed is the protection and enforcement of intellectual property rights. The trade truce is set to expire on the 1st March, giving negotiating teams one month to reach a deal or face the possibility of higher tariffs.

The US earnings season gets into full swing this week, with 123 S&P 500 companies set to report fourth quarter corporate results. 109 companies have reported thus far and the results have been more or less in-line with historical trends, with 75% of companies beating earnings and 59% beating revenue estimates. Worryingly, there has been a growing list of companies that have raised concerns over the risks to future earnings due to slowing global growth. This week sees tech heavyweights Apple, Amazon, Microsoft and Facebook as well as industrial giants Boeing and Caterpillar report results, with guidance over future earnings likely to be the key driver of share prices.

The US Federal Reserve holds its first Federal Open Market Committee meeting of the year. Fed policymakers are suggesting they are firmly in patience mode, so no change in interest rate policy is expected. Instead investors will be closely watching Fed Chair, Jerome Powell, in his post meeting conference for clues into the likely duration of the pause in monetary policy. Investors will also be looking for more clarity on the speculation that the Fed is intending to end its balance sheet reduction programme shortly.

It’s also an eventful week on the economic front. Both the US and Europe are scheduled to release first estimates for economic growth over the fourth quarter of 2018. The releases will show if the US economy has managed to sustain its robust pace of growth, whilst also highlighting the extent of the slowdown in growth in Europe.

We also receive manufacturing business confidence surveys from across the globe, with China’s release of particular interest. As a reminder, the Chinese reading slipped into contraction territory last month and a further decline in confidence may only elevate concerns over the health of the Chinese economy.

The other notable data release is the US employment report for January. The US economy is expected to have added 165k jobs in January, although this number could be distorted by the recent government shutdown. As always with the employment report, the annual wage growth figure will be the key focus as it provides a good indication into the health of households’ budgets as well as the level of inflationary pressures within the US economy.

Going on in the engine of Brexit

It’s another pivotal week in the Brexit process, with all eyes focused on Tuesday night, when a series of amendments put forward by MPs with respect to the current withdrawal agreement are due to be voted on in parliament.

Theresa May presented her “Plan B” for Brexit last week, which looked remarkably similar to her “Plan A”, except for some small amendments around time constraints on the Irish backstop and giving Parliament more influence on the next stage of negotiations, the future trading relationship.

The Speaker of the House of Commons will determine which amendments put forward by MPs will be voted on in Parliament. The two that are gaining most attention are from rival Brexit camps. Labour backbencher, Yvette Cooper’s amendment would force the government to seek an extension of Article 50 if no Brexit deal can be reached in Parliament by the 26th of February. The other proposed by Tory backbencher Graham Brady, requires the Irish backstop to be replaced with an alternative arrangement. This amendment appears to be gaining support from Conservative hard Brexiters, who appear to view Theresa May’s deal as better than not leaving the EU at all. For now it seems we are in wait-and-see mode to see which amendments are voted on and what level of support they receive. The outcome of this week’s votes will likely have a material sway on the direction of the Brexit process.

In the rear view mirror of last week we saw

In the UK, economic data provided a welcome distraction from Brexit headlinesand a rare bit of good news for the economy. The employment report showed the UK economy added more jobs than expected in November, with wages also continuing to grow at a relatively healthy pace.  Annual wage growth, excluding bonuses reached 3.3% in Novemberand when combined with falling levels of inflation, suggests households real earnings are starting to receive a substantial boost, which is a positive result for consumer spending heading into 2019.

In the US, the longest government shutdown in history, lasting 34 days, temporarily ended on Friday. US President Donald Trump agreed to provide funding for the government until February 15th, to allow time for lawmakers to reach a compromise of key issues like immigration and border security. Worryingly, he has also warned that he is prepared to shut down the government again if a deal cannot be reached. The president agreed that the 800,000 Federal workers impacted by the shutdown will receive back pay, which should limit the economic damage of the partial closure of government.

As widely expected, the two major central bank meetings held last week, the European Central Bank (ECB) and Bank of Japan (BoJ), produced no major changes in monetary policy. The ECB downgraded their outlook for the economy, noting risks to growth have moved to the downside. The message from the BoJ had a similar negative tone, and the cautious stance from both central banks suggests neither is in a hurry to tighten monetary policy.

The economic data last week would have provided little cheer for both central banks, with the PMI business confidence readings in both regions disappointing. In Europe, the German manufacturing confidence survey fell into contraction territory, with trade wars and a slowdown in global growth blamed for the loss in business confidence. While in France, the “yellow vest” protests saw service sector sentiment fall further into contraction territory. The Japanese manufacturing survey was equally as bleak, with confidence amongst manufacturing firms dropping to the lowest level since 2016.

In the side view mirrors of corporate activity we notice

One of the UK's largest challenger banks, Metro Bank, suffered a steep decline in share price last week. The bank warned that it was more exposed to riskier loans, including commercial mortgages and specialist loans than previously reportedand may have to raise capital to strengthen its financial position. The bank also warned that an intensively competitive mortgage market in the UK has started to slow revenues. Shares in the bank ended the week 30% lower.

It is hoped that the resignation of Carlos Ghosn from the position of chairman and chief executive of Renault will be enough to save Renault’s alliance with Nissan. Ghosn was previously chairman of Nissan, before being arrested in Japan on charges of financial misconduct in November. It's hoped the leadership change can help address tensions between the two over their capital structure. Renault holds a 43% voting stake in Nissan, whilst its Japanese partner only holds a 15% stake in the French group, despite it being the bigger profits generator of the two.

Source: Bloomberg. Figures are for the period 21st January to 25th January 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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