Posted on: 10 August 2016
Straight batting on a sticky wicket
Just as England’s cricketers expect a tough fourth test against Pakistan tomorrow, both retail banks and the Bank of England (BoE) have been reacting to their own set of stress tests this week. The Commentary looks at some of the key economic developments over the last seven days and asks what they mean for investors.
Interest rate cut
The BoE’s Monetary Policy Committee (MPC), as widely expected, voted to cut interest rates by 25 basis points to 0.25% last Thursday as part of a wider package of measures designed to provide an additional stimulus to the UK economy, following the EU Referendum.
Here at Duncan Lawrie, we have decided to hold rates for now for our account holders, but will keep this under review.
QE and failed Bank of England bond buy-back
As well as the rate cut the BoE has provided further stimulus through a government bond buying programme, or gilts, as part of its new quantitative easing (QE) programme to stimulate the economy.
However, as reported this morning, the return on some UK government debt turned negative after the Bank of England missed its target in a new bond buying operation.
The bank fell £52m short of its £1.17bn target when it failed to find enough sellers. That has driven up prices and pushed down the return to investors, or yield.
Gilts maturing in 2019 and 2020(1) were yielding -0.1%. The government benchmark 10-year Gilt yield has fallen and is losing 2bps (basis points) every day. Today it lost 7 bps to 0.52%. This has huge implications for final salary pension schemes.
In addition the FTSE 100 fell around 15 points this morning - retreating from a 14 month high - taking it back below 6840.
We are watching the situation carefully on behalf of the funds we manage.
A post-referendum slump in spending has been avoided, according to a retail sales survey commissioned by the British Retail Consortium (BRC) and KPMG.
Total retail sales were up 1.9% in July compared with a year ago, while like-for-like sales rose by 1.1%.
Fashion sales rose markedly in July, compared to June, online faring better than high street sales. The good weather prompted more picnics and barbeques, boosting food and drink sales.
Overall sales increased 1.1% between May and July, according to the research and sunnier weather had helped "blow away some of the post-referendum blues," added David McCorquodale, head of retail at KPMG.
After yesterdays’s failed government bond buy back by BoE the pound is hovering around $1.30.
The effects of a weak pound have been well documented post the UK’s vote to leave the European Union.
This week the BBC reported(2) that flight bookings to the UK have jumped since June, driven by the sharp fall in the pound following the vote to leave the European Union.
Overall, there were 4.3% more flights booked to the UK in the 28 days following the vote than last year. This includes bookings from Hong Kong, which leapt by 30.1%, while the US saw a 9.2% increase and there was a 5% rise in bookings from Europe.
UK companies who import raw materials from Europe and the rest of the world are facing larger costs.
Some firms have no alternative but to import raw materials and goods from abroad. For example, companies importing champagne or Spanish food items to sell to British consumers will be facing challenging times as the Euros strength has reduced their profit margins.
In recent years, the UK agricultural sector has seen a rise in UK produced fruit and veg, but this has been heavily reliant on migrant labour. If firms find it hard to attract workers because of weaker pound, they may shift production overseas.
US & APAC
Japanese shares enjoyed a robust start to the week, following last Friday's strong US jobs figures.
The US economy added a better-than-expected 255,000 jobs in July, fuelling speculation that the Federal Reserve could increase interest rates before the end of the year.
Long term planning
As with all portfolios under Duncan Lawrie’s management, we are monitoring economic events closely and assessing the broader macro implications.
All data has been compiled by Duncan Lawrie from sources believed to be reliable. Full details of sources are available on request.
The comments and figures in this document are generally applicable but you should always take specific advice to suit your individual circumstances before taking any action. Errors and omissions excepted.
The value of investments and income generated may fall as well as rise, and investors may not get back the amount invested. Past performance is not a reliable indicator of future results.