Market Bulletin (12/09/2017)

Loonie tune

 

The common loon was never meant to appear on Canada’s dollar coin, which in June reached its thirtieth birthday. But when the dies for the new design disappeared en route to the Ottawa mint – perhaps bound for a counterfeiter’s workshop – the expressive diving bird, known for its distinctive cries, was adopted instead.

 

Last week the ‘loonie’ soared to a two-year high against the US dollar. Although the currency’s value had already benefited from dollar weakness, the proximate cause of last week’s rise lay closer to home – a decision by Canada’s central bank to raise interest rates to 1%. The accompanying central bank report noted the strength of Canada’s economy, but also acknowledged that geopolitics and trade tensions had already provided tailwinds for the currency.

 

There are, of course, plenty of geopolitical developments and trade tensions to worry about – not to mention colourful rhetoric from some of the key players. Last week, the US ambassador to the UN warned that North Korea was practically “begging for war” with its provocative nuclear tests. At a subsequent meeting of the BRICS countries (Brazil, Russia, India, China, South Africa) in China, Vladimir Putin countered that North Koreans would rather “eat grass” than give up on their missile programme.

 

If Donald Trump seemed somewhat less forthright on global issues than usual, that may have been because his focus was four-square on Washington, D.C., where he took the surprise decision to agree to a Democrat offer to extend the government debt ceiling to mid-December – apparently without meaningful negotiations and certainly without Republican Congressional approval.

 

With the exception of Japan’s Nikkei 225, which dipped 2.1%, leading global stock indices were relatively unresponsive to the week’s events – the S&P 500 dropped 0.51% over the five-day period. Indeed, investors were far more interested in the gnomic pronouncements of the world’s leading central bankers. Rates globally may only just be emerging from historic lows – 5,000-year lows, according to the Chief Economist at the Bank of England. But while markets responded positively to Canada’s rate rise, their primary focus was not rates but quantitative easing – especially in the eurozone.

 

Cruising speed

 

Speaking at an ECB press conference on Thursday, Mario Draghi announced that the bank will next month publish its plans to scale back quantitative easing. It’s been a long wait – and the ECB has trillions of euros worth of bonds to offload – but the ride ahead is at least expected to be calmly piloted. In its notes, the bank highlighted the upturn in growth in the eurozone, an upturn that has been one of the global economic highlights of 2017. The ECB forecasts inflation at 2.2% this year, although believes it will fall back to 1.2% next year. The euro rose in the wake of the comments, although European stocks suffered somewhat as a result. The Eurofirst 300 ended the week down 0.17%.

 

Frankfurt, home to the ECB, is already enjoying supportive tailwinds from elsewhere, if the words of John Cryan are anything to go by. Last week, the CEO of Deutsche Bank expressed surprise that anyone was still asking which EU city would benefit most from those financial services businesses that choose to shift jobs out of London. “The race has already been won before it even began,” said Cryan. He listed market infrastructure and breadth, taxes and regulation as key issues a city needed to have right in order to attract the top companies in the sector: “there is only one European city that can fulfil the requirements,” he said. The head of the Deutsche Börse agreed, saying that Frankfurt would be the “massive winner”. In fact, the larger question may yet be over the scale of any exodus, given London’s multiple advantages as a financial services hub.

 

While global politics and Hurricane Irma held the headlines, the first televised debate ahead of the German election sat firmly at the other end of the spectrum: calm, well-mannered, and nuanced. On many areas, Angela Merkel and Martin Schulz appeared to disagree very little. After the excitement of the Brexit referendum and the US and French elections, Germany’s federal elections later this month should not trouble the box office too much – even if Schulz pulls off a surprise victory.

Hot air?

 

Not so Brexit negotiations, which continue to offer plenty of snappy soundbites, loud public criticisms and general headline fodder, but only limited signs of progress. The leaking last week of a Home Office document outlining the UK’s post-exit approach to immigration proposed a far tougher system than had been anticipated. The report introduced a ‘Britain first’ policy that would prioritise training UK workers and dial down the access rights of EU workers to be little different from those of non-EU workers. For skilled workers, however, changes were pretty minimal – immigration could probably continue relatively unchanged. It remains to be seen whether the leak was made in order to register the level of opposition before offering a watered-down version.

 

Agriculture and hospitality are possible casualties of the outlined approach. The British Hospitality Association last week warned that the paper’s provisions could prove “catastrophic”, while the British Farmers Union complained they would cause “massive disruption to the food supply chain”.

 

Those MPs who favour a hard Brexit could feel a little more wind in their sails last week; reports said many were regrouping in parliament to oppose the emerging government position on Brexit – in order to harden it. John Redwood, a veteran of financial markets and veteran Eurosceptic, said that the UK need not fear operating under World Trade Organisation rules – the default arrangement should a deal between the UK and EU not be reached before the deadline.

 

The possibility of a no-deal scenario certainly appears to be rising. The cross-Channel spat continued last week, stoked by the apparent impasse reached over the divorce bill. Theresa May expressed a desire to now fast-track talks by negotiating day-in day-out, but Michel Barnier said that such an approach was unrealistic. The initial timetable – under which exit talks were slated for October – looks increasingly likely to be delayed. Barnier accused the UK of “backtracking on its commitments.”

 

Beyond the fallout, indicators suggested the UK economy had been slipping – but may now be gaining altitude. UK construction growth came in at a disappointing level early in the week, while service sector growth struck an 11-month low, and exports to non-EU countries fell (while exports to the EU rose). Yet on Friday, manufacturing data came in strongly and the broader economy recorded a pick-up in growth in the three months to August, as the economy expanded 0.4%. The FTSE 100, however, fell 0.73% over the five-day period, as a falling copper price hurt mining companies.

 

Despite the continued Anglo-EU spat, much of the focus in parliament last week was on the second round of the Finance Bill. When Theresa May called a snap election earlier this year, a number of policy reforms were dropped from the bill, in order to facilitate its rapid passage through the Commons ahead of the election. Last week the government published its second instalment.

 

A reduction in the time period before which non-domiciled UK residents become deemed domicile was one of the reforms that the government had put on ice. But last week it confirmed the measure, shifting the threshold from 17 to 15 of the last 20 tax years. A pledge to ban cold calling – as part of a crackdown on pension scams – was again deferred. But the bill confirmed the cut in the tax-free dividend allowance from £5,000 to £2,000 – to be implemented from April 2018; a measure that reinforces the importance of making full use of tax-advantaged opportunities such as ISAs. It also confirmed the cut in the money purchase annual allowance from £10,000 to £4,000, effective from April 2017, which limits the amount that can be invested in a pension by those who have already taken benefits. The government has faced some criticism over its quick-fire changes to policy, which can all too easily hamper financial planning. In such circumstances, avoiding the pitfalls becomes harder – understanding your options and seeking out good advice is a sensible place to start.

 

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