Shorter Days, Limited Daylight

The big news last week happened on Thursday when the Bank of England raised interest rates back up to 0.5 per cent. This was widely expected and, in fact, in the immediate aftermath of the vote, Sterling fell against other major currencies. This is unusual; in most cases, a rise in interest rates increases Sterling’s appeal, thus resulting in a strengthening of the currency.

However, with the Bank of England having talked up this change in interest rates, it had already been factored into the markets. The statement that followed, which said that there should only be another two increases spread over three years, settled the markets. This is hardly hawkish in tone, especially as these will be very dependent on the performance of the UK economy. So, we would say that any newsworthy action on interest rates is most likely off the agenda for the foreseeable future, assuming that inflation reverts back to the 2 per cent target, as the Sterling effect drops out of the numbers. 

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This move certainly isn’t a reason for savers to be jumping up and down with joy; we hardly expect this to be passed on to savings accounts across the UK. What the banks will do, and there is already evidence for this, is increase their margins by factoring this rate into those on variable rate mortgages. Credit cards and other unsecured debts will also adjust but the poor saver will be lucky if they see any benefit. 

Other developments of interest which we observe are the true intentions of Trump’s visit to Asia. His ability to make a heavy-handed tweet or say some confrontational statement is legendary, so there is always a chance he will reignite anti-globalisation concerns or North Korea rhetoric. Meanwhile, the markets await the outcome of his tax plan, which has now moved into the second year, after the US election that put him in the White House. Will this market sensitive piece of legislation actually make it through Congress? 

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We are just two weeks from the UK Autumn Statement, which is an important one. Speculation is at fever pitch as to what will be delivered. Most likely, there will be an apparent shift to the left in an attempt to appeal to the broader populace; a recognition of the realistic opposition that Labour now present. Whether this will be successful remains to be seen but the differences between the rich and poor are being increasingly exposed, as shown by the most recent offshore revelations and tax avoidance schemes employed by royal advisers. 

One final thing worth mentioning is the sexual assault allegations that seem to be surfacing. Whilst this might not be so relevant when it is limited to disgraced Hollywood bigwigs and actors, we certainly think it is worth mentioning when it extends to our own MPs in Parliament. Last week, defence secretary Michal Fallon resigned his post on the front bench for inappropriate behaviour towards a journalist 15 years ago, whilst also warning that there could be further allegations to come to light! 

This could well have a snowball effect and result in many more people coming forward. Whilst the voting public acknowledge and accept that MPs may not always behave in the way they would have us believe, we can be sure of one thing: there will be no quarter given to sexual assault. MPs are there to represent the voting public; any serious allegation of sexual assault should result, in the very least, the MP in question losing their job.

With accusations levelled at both the major parties, this could potentially have more serious consequences for the future of Theresa May’s government, and could prove problematic for the Tory party and their slender majority. If there are a number of serious allegations that prove to be true and a few Tory MPs were indeed to lose their jobs, then this could result in several by-elections, thus running the risk that the government lose their ‘confidence and supply’ majority with the DUP. If this does happen, then where does it leave the UK on Brexit? However, there is nothing to say that the Tories couldn’t increase their majority with Labour standing accused of promoting an MP to the front bench following allegations of sexual assault. 

So, on balance, not a great week for the Sterling outlook – the Brexit negotiators need to announce something positive on Brexit soon and certainly before Christmas, which will instil some confidence in the process. Industry bodies are starting to pile on the pressure that they will begin planning for a ‘no deal’ outcome if there is no agreement by the year-end. UK equities remain one of the most under-owned asset classes for the International investor and have underperformed overseas developed markets over the last six months. Therein lies the opportunity some would say but this takes a lot on trusting that some clarity appears soon. 

As the days get shorter at this time of year, we are all spending too much time in the dark on Brexit. We desperately need some daylight to lift the gloom.  

Guy Stephens is technical investment director at Rowan Dartington.

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