• First week of April a strong one for equities, despite ongoing ‘trade war’ fears between the US and China.
• Donald Trump tweets “President Xi and I will always be friends, no matter what happens with our dispute on trade. China will take down its trade barriers because it is the right thing to do”.
• After the US detailed the $50bn of tariffs on Chinese goods, Beijing responded with its own targeted list. President Xi is set to comment on situation in speech on Tuesday.
• The Omnis view: we still believe this is a case of both sides posturing for negotiation. A full trade war is not in the interests of any nation.

• Widely followed non-farm payrolls measure shows US created 103,000 jobs in March, against analyst predictions of around 190,000.
• Employment increased in manufacturing, health care and mining, while retail trade and construction dipped.
• However, US labour market remains healthy with unemployment at 4.1% for sixth straight month.
• The Omnis view: the US economy remains in a strong state though market valuations reflect this.

• Train staff begin three months of nationwide rolling strikes in dispute over government’s planned overhaul of state-run railway SNCF.
• It’s the latest of Emmanuel Macon’s economic reforms, and potentially the toughest challenge of his presidency so far.
• Macron is taking a pro-business and pro-liberalisation stance as he looks to modernise the French economy and fix troublesome public finances.
• The Omnis view: these measures may cause temporary pain for Macron’s popularity, but the reforms are needed to modernise France’s labour practices.

• A month on from the Italian election, which ended in a hung parliament, fresh talks are underway to form a coalition government.
• Anti-establishment 5-Star Movement were largest single party, with leader Luigi Di Maio calling on his Democratic Party rivals to “bury the hatchet” and consider a governing coalition with his party.
• However, Italy’s three rightist parties - the League, Brothers of Italy and Silvio Berlusconi’s Forza Italia - have presented a new united front with hopes of an alliance.
• The Omnis view: the formation of an Italian government may take some time and its makeup does not seem to bother investors at present.

• EU statistics agency Eurostat said unemployment across 19 eurozone countries fell to 8.5% in February, from 8.6% the previous month – the lowest level since December 2008.
• The number of people out of work fell by 141,000 to below 14 million.
• While unemployment was down, annual eurozone inflation jumped to 1.4% in March, ending several months of decline.
• The Omnis view: we are encouraged by the eurozone’s ongoing reduction in unemployment, though no central bank action is likely while inflation remains below 2%.

• On Wednesday, the Federal Reserve (Fed) will release minutes from its March 20-21 meeting, when it voted unanimously to raise its benchmark federal-funds rate to a range of between 1.5% and 1.75%.
• On Friday, Fed chairman Jerome Powell reaffirmed the central bank’s slow and steady path of raising interest rates. The March meeting minutes likely will reflect plans to continue this pace.
• Analysts are predicting the US core reading of inflation is set to hit 2% for March, matching the Fed’s target.
• The Omnis view: US inflation looks to be under control, so we would expect no more than two more rate rises in 2018.

• While trade war rhetoric dominates headlines, China will release latest year-on-year data on imports and exports on Friday.
• Analysts predict exports were down markedly in March from the 44.5% growth in February, leading to a smaller trade surplus.
• Distortions in year-on-year trade growth that impacted February’s figures were caused by the festivities around the lunar new year.
• The Omnis view: President Xi Jinping is unlikely to announce market reforms to heal US/China trade relations at a speech on Tuesday. We await talks between the two sides.

MARKETS SHRUG OFF SYRIA ATTACK, WHILE INVESTORS AWAIT RUSSIAN RESPONSE 

• Allied strikes on Syria have had a limited impact on major stock markets.

• Syrian ally Russia has yet to respond, while there are reports that Washington is poised to increase pressure on Moscow with fresh economic sanctions.

• Oil surged in value last week, but prices have since fallen back. Russian stocks and the rouble have been on the slide.

• The Omnis view: there has been little impact on our funds. The Omnis Emerging Markets Equity Fund has a small exposure to Russian stocks, which have since rebounded following last week’s falls.

GLOBAL STOCKS RALLY AS CHINESE LEADER COOLS TRADE WAR TALK… 

• Speaking at Boao Forum for Asia, president Xi Jinping promised lower import tariffs on some products, including cars.

• Also promised were measures to widen market access to foreign investors, and protection of the intellectual property of foreign firms.

• President Trump tweeted his thanks for the Chinese president’s “kind words”, adding “we will make great progress together”.

• The Omnis view: We think that both sides will continue to posture ahead of talks.

… WHILE CHINA REPORTS SURPRISE TRADE DEFICIT

• China recorded a trade deficit of $4.98bn in March, the first deficit since February 2017.

• But, the country’s trade surplus with the US surged 19.4% to $58.25bn between January and March.

• Exports gained 14.8% from the same period a year earlier, while imports rose only 8.9%.

• The Omnis view: a stronger yuan may now be taking its toll on China’s exports; however, first quarter figures are expected to show the economy remaining strong (see below).

DISAPPOINTING FIGURES FOR UK MANUFACTURING AND INDUSTRIAL OUTPUT

• UK manufacturing dipped by 0.2% in February, according to the Office for National Statistics, the first time output has dropped since March 2017.

• Overall industrial output increased by 0.1% in the same month, boosted by surge from energy sector due to the cold weather.

• Despite weaker numbers, an Institute of Directors survey finds company directors mostly positive on UK’s economic prospects.

• The Omnis view: we remain cautious on the UK in the run-up to Brexit, while the latest inflation data released this week will give a clearer picture on future monetary policy (see below).

CLIMB IN US INFLATION RAISES CHANCES OF A FURTHER RATE RISE IN 2018

• The Labor Department said that the US core consumer price index (CPI), which excludes food and energy prices, advanced 0.2% last month, and was up 2.1% year-on-year.

• The Federal Reserve’s (Fed) preferred gauge of inflation, a consumption-based figure, is still shy of its 2% target.

• The Fed has already raised rates once in 2018 and has indicated two more hikes are on the way; but could there be a third?

• The Omnis view: the US economy continues to grow,but we think the Fed will be cautious in its approach to interest rates. This week the US corporate earnings season should give more information on the state of the economy.

LOOKING AHEAD - TALKING POINTS

CHINESE GDP DATA DUE FOR FIRST QUARTER OF 2018

• China will release first quarter gross domestic product (GDP) data on Tuesday, along with March industrial output, retail sales, property sales and investment, and fixed asset investment data.

• Policy makers have set a target of 6.5% growth, but polls of economists from Bloomberg and Reuters see GDP closer to 6.7% or 6.8%.

• Central bank governor Yi Gang said on Thursday that first quarter economic data has so far been slightly better than expected.

• The Omnis view: the health of the second largest economy in the world is important for growth prospects because of the interconnected nature of economic activity due to globalisation. Chinese growth rates are expected to slow in future years, just by virtue of size, but the market is sensitive to surprises.

CHINA GDP ANNUAL GROWTH RATE (%) – JANUARY 2015 TO DECEMBER 2017

Source: National Bureau of Statistics of China, tradingeconomics.com

UK AND EUROZONE INFLATION DATA DUE; COULD BANK OF ENGLAND MONETARY POLICY BE IMPACTED?

• March inflation data from both territories is due on Wednesday – if UK inflation is high, EUR/GBP exchange rate likely to remain low.

• UK inflation is expected to have held steady as a drop in food and fuel prices was offset by higher airfares around the earlier Easter holidays.  

• Eurozone consumer price inflation (CPI) is expected to pick up to 1.4% year-on-year with prices of services and food, alcohol and tobacco rising at a faster pace.  

• The Omnis view: slower growth from UK CPI could ease pressure on the Bank of England, which is widely expected to hike interest rates beyond 0.5% in May.

UK INFLATION RATE (%) – MARCH 2017 TO FEBRUARY 2018

Source: Office for National Statistics, tradingeconomics.com

KEY QUESTIONS FOR ITALIAN ECONOMY AS NEW COALITION GOVERNMENT IMMINENT

• Five Star Movement and anti-immigration League close to clinching a deal to lead the country after 10 weeks of political stalemate.

• Uncertainty around the future of the Italian economy leads to volatility in the country’s equities and bonds.

• Leak of coalition’s draft plan shows proposals to ask the European Central Bank to write off €250bn of debt as well as to set up procedures allowing EU member states to exit the euro.

• The Omnis view: it is hard to see what impact a partnership between two very different political forces will have on the Italian economy, though we are encouraged that volatility has so far been contained to domestic assets.

COMMODITIES BOOST HELPS FTSE 100 HIT NEW RECORD HIGH

• Strong oil prices help FTSE 100 push to record high closing of 7,787 points on Thursday 17 May.

• BP and Shell among the winners, while a weaker sterling has also been a boon to companies with big overseas business.

• The price of oil has hit its highest level since November 2014, in part because of Donald Trump’s decision to exit a nuclear deal with Iran, a major exporter.

• The Omnis view: UK equities have bounced back strongly from a downturn earlier in the year. However, we remain cautious on the asset class based on Brexit uncertainty.

UK EMPLOYMENT AT RECORD HIGH WHILE WAGES CLIMBING FASTER THAN INFLATION FOR FIRST TIME IN A YEAR

• Office for National Statistics reports that employment has climbed to a new high of 75.6% with the jobless rate at 4.2%.

• UK wages climbed at an annual rate of 2.9% in the first three months of the year, with the latest inflation figure at 2.5%.

• Average total pay was £515 a week in nominal terms, before tax and other deductions, for UK employees in March.

• The Omnis view: this is encouraging news for UK workers, though real term wage growth of 0.4% is still very low and its remains a challenging time for consumer spending.

MIXED NEWS FOR JAPAN AS ECONOMY SHRINKS, BUT WAGE GROWTH ON THE RISE

• World’s third-largest economy contracted at an annualised rate of 0.6% in first quarter of 2018 as consumption and capital expenditure slowed.

• On a quarter-on-quarter basis, the economy shrank 0.2% compared with growth of 0.1% at the end of 2017.

• However, wages increased by 2.1% year-on-year on the back of tight labour conditions.

• The Omnis view: this is the first time in two years that the economy has shrunk, though many of its listed companies remain in good health and have contributed to strong performance from the Omnis Asia Pacific Equity Fund in particular.

DOUBTS OVER TRUMP AND KIM JONG-UN SUMMIT AS PYONGYANG GETS EDGY

• North Korea has threatened to abandon historic leaders’ summit as it accuses the US of putting it “into a corner” on nuclear disarmament.

• But Washington officials say preparations still underway for meeting in Singapore on 12 June.

• North Korea has also cancelled high-level talks with its southern neighbour, angered by continuing US-South Korea joint military exercises which it sees as a rehearsal for invasion.

• The Omnis view: June promises to be a vital month for US diplomatic relations with Asian countries, given the meeting in Singapore as well as ongoing trade negotiations with China.

LOOKING AHEAD - TALKING POINTS

UNEMPLOYMENT DATA A SIGN OF MACRON’S PROGRESS ONE YEAR ON

• Analysts are looking for any changes to the 8.9% unemployment rate in France, registered at the end of 2017.

• A year into the job as president, the jury is still out on Emmanuel Macron’s efforts on economic reform.

• Labour laws passed in September 2017 allow companies to reach deals with workers rather than comply with industry wide rulings on working hours, pay and overtime.

• The Omnis view: unemployment levels remain high in France, particularly among the young, with many workers on limited-time contracts. Macron must work to address the problem if the economy is to thrive.

FRANCE UNEMPLOYMENT RATE (%) – FEBRUARY 2015 TO JANUARY 2018

Source: Insee, France, tradingeconomics.com

FED MINUTES TO REVEAL PACE OF FUTURE RATE HIKES?

• The minutes from the Federal Open Market Committee (FOMC) meeting will give investors insight into its recent decision to hold the federal funds rate at 1.5-1.75%.

• By the end of 2018, would we have seen three rate rises or four? It depends on the view on inflation and the overall health of the economy.

• Markets are pricing in a 96.7% probability that the central bank will hike rates again at its June meeting.

• The Omnis view: given the size of its economy, the pace of interest rate rises in the US is of huge significance globally, particularly if there were to be a policy mistake.

US FED FUNDS RATE (%) – JANUARY 2015 TO MAY 2018

Source: Federal Reserve, tradingeconomics.com

UK INFLATION SLOWDOWN REDUCES LIKELIHOOD OF A SUMMER INTEREST RATE RISE

• UK consumer price inflation (CPI) unexpectedly fell to 2.4% in April, according to the Office for National Statistics (ONS).

• The figure fell from the 2.5% registered in March, due in part to lower airfares.

• The Bank of England delayed a rate hike earlier in May, and is considered unlikely to move again in the near term.

• The Omnis view: while the headline inflation figure remains above the Bank of England’s stated 2% target, higher interest rates would place an extra burden on the UK’s fragile economic growth.

MINUTES SUGGEST FED IS ON TRACK FOR SLOWER PACE OF RATE HIKES

• Minutes from the May meeting of the Federal Open Market Committee (FOMC) suggest it would “soon be appropriate” to hike rates should the current outlook remain intact.

• A move in June is likely, with inflation currently above the target level and unemployment at low levels.

• Nonetheless, the minutes were interpreted as “dovish”, with the FOMC expressing a willingness to allow the inflation rate to rise above the “symmetric” 2% target for a “temporary period” while the economy continues to expand.

• The Omnis view: the dovish interpretation of the minutes has lowered expectations of a further four rate hikes this year. The market now thinks three hikes more likely. A steadier pace of hikes from the FOMC should reduce the potential for significant market disruption. 

RISE IN FRENCH UNEMPLOYMENT A BLOW FOR MACRON REFORM

• Unemployment in France rose slightly in the first three months of the year from 9% to 9.2%, according to national statistics office Insee.

• President Macron had hoped that changes to employment law would bring the jobless total down.

• IHS Market’s composite purchasing managers’ survey showed French business activity slowed more than expected in May, falling from to 54.5 from 56.9 in April.    

• The Omnis view: while progressive reform is important for the long-term future of France and the eurozone, a more immediate concern is whether the data points to a marked downturn in the European economic cycle. For now, however, the slowdown in Europe appears temporary.

GERMAN CONSUMER SENTIMENT FALLS, BUT BUSINESS CONFIDENCE HALTS SLIDE

• GfK’s consumer sentiment indicator, a survey of around 2,000 Germans, slipped to 10.7 points in June from 10.8 in May.

• Private consumption has become the main source of economic expansion in Germany in recent years.

• The Ifo Institute’s showed business confidence halted a five-month slide, holding at a measure of 102.2 in May.

• The Omnis view: investors are wary of any signs of slowdown in the eurozone’s largest economy. However, the German economy remains robust and capable of withstanding a temporary slowing of growth.

‘WILL THEY OR WON’T THEY’ DRAMA IN TRUMP AND KIM JONG-UN TALKS

• Having been cancelled, there are now indications that the Trump-Kim summit scheduled for 12 June may in fact go ahead.

• Trump said that his administration has restarted dialogue with Pyongyang, having previously withdrawn from the talks given Kim Jong-un’s “tremendous anger and open hostility”.

• The US and its international allies, such as South Korea and Japan, have tried to isolate North Korea economically to force its leader to abandon his nuclear ambitions.

• The Omnis view: while this saga is likely to drag on to 12 June and beyond, it has had little impact on markets.

LOOKING AHEAD - TALKING POINTS

SLEW OF DATA RELEASES DUE FROM THE US 

• Economists expect the non-farm payroll report to show an uptick in wages and the pace of hiring, while there are also updates on consumer confidence, personal income and mortgage applications.

• The US economy added 164,000 jobs in April and this is expected to have risen in May, while the unemployment rate is estimated to remain steady at 3.9%.

• Personal income data for April is expected to rise at a similar month-on-month rate as in March, when it climbed by 0.3%.

• The Omnis view: positive data points would help ease concerns over slowing global growth that have gripped markets in recent weeks. This in turn would focus the attention back on the Federal Reserve.

US UNEMPLOYMENT RATE (%) – MAY 2017 TO APRIL 2018 

Source: US Bureau of Labor Statistics, tradingeconomics.com

NEW NAMES EXPECTED IN FTSE 100 QUARTERLY RESHUFFLE

• The make up of the index, which is home to the UK’s 100 largest listed companies, is reviewed on a quarterly basis.

• Any company that falls to 111th and below is automatically ejected from the index, while any firm that rises to 90 or above is automatically promoted.

• Online grocer Ocado Group is expected to make its FTSE 100 debut, while mainstay Marks & Spencer could be demoted.

• The Omnis view: while the ins and outs of the FTSE 100 is not of great concern to long-term investors, the rise and fall of certain UK companies, particularly retailers, can be an important gauge of wider economic trends.

FTSE 100 – MAY 2015 TO MAY 2018

Source: London Stock Exchange

US JOBS FIGURES IMPRESS, WHILE ECONOMIC GROWTH REVISED SLIGHTLY LOWER 

• US jobs growth faster than expected, with a further 223,000 new positions added in May.

• Unemployment rate fell to an 18-year low of 3.8% during the month, from 3.9% in April.

• The second estimate of gross domestic product (GDP) for the first quarter of the year was 2.2%, slightly lower than the original estimate of 2.3%

• The Omnis view: US economic data like this is encouraging and follows on from a positive US earnings season.

US/CHINA TRADE TALKS END IN STALEMATE AS G7 FINANCE MINISTERS RAISE CONCERNS

• Latest discussions over the weekend centred around US agricultural and energy products.

• Beijing says it will not sign up to buy more US goods until the Trump administration has promised not to impose further tariffs on Chinese exports.

• At a G7 meeting in Canada, officials criticised US tariffs on steel and aluminium imports which “undermine open trade and confidence in the global economy”.

• The Omnis view: while ongoing fears of a trade war dominate the news agenda, stock markets have remained resilient to negative headlines as they are seen as points within the negotiation process and not the final outcome.

UK MANUFACTURING PICKS UP SPEED IN MAY, WHILE MODEST RECOVERY CONTINUES FOR CONSTRUCTION SECTOR

• The Markit/CIPS UK Manufacturing Purchasing Managers’ Index (PPI) rose to 54.4, recovering from a fall to 53.9 in April.

• Brexit concerns weigh on construction with the HIS Markit/CIPS UK Construction PPI holding at 52.5.

• Activity in May was buoyed by firms catching up on disruptions caused by poor weather conditions in March.

• The Omnis view: the Bank of England is looking for concrete signs that the UK economy is picking up from a slow start to the year before it will consider any gradual interest rate rises.

SPANISH AND ITALIAN POLITICAL UNCERTAINTY BRINGS MORE CHALLENGES TO THE EUROZONE

• Spanish prime minister Mariano Rajoy suffers defeat in a vote of no-confidence, having been implicated in a corruption scandal. 

• Pedro Sanchez of the Spanish Socialist Workers’ Party sworn in as his replacement, prompting calls for more talks around Catalonian independence.

• Italy’s new populist government takes power, headed by prime minister Giuseppe Conte.

• The Omnis view: Italian bonds were among the most volatile assets last week, though these make up only a small position in the Omnis fixed income funds.

MERKEL OFFERS CLARITY ON EUROZONE REFORM, AHEAD OF EU SUMMIT

• In an interview with German newspaper FAS, Germany’s chancellor backed the idea of turning the eurozone’s ESM bailout mechanism into a European Monetary Fund to offer short term loans for countries suffering economic stress.

• Merkel also backed the step-by-step introduction of a eurozone investment budget, and called for common asylum standards.

• Merkel and French prime minister Emmanuel Macron will present a joint plan for reform at the end of June.

• The Omnis view: given the aforementioned uncertainty in Spain and Italy, it is important that Europe’s largest economies present a united front and investors will be looking for further clues on this plan ahead of the next EU summit.

LOOKING AHEAD - TALKING POINTS

EUROZONE WATCHERS AWAIT GERMAN MANUFACTURING, INDUSTRIAL PRODUCTION AND TRADE BALANCE DATA

• German factory orders data is expected to have rebounded for April, having surprisingly fallen by 0.9% month-on-month in March.  

• Industrial production data for April is due on Friday, with factories in Europe’s largest economy having ended the first quarter of the year on a strong footing.

• Germany’s trade surplus came in at a healthy €25.2bn in March. Shares in car manufacturers have since been hit amid rumours of a plan from Donald Trump to cut imports in to the US.

• The Omnis view: while the German economy slowed in the first quarter of the year, economists believe this was a temporary blip caused in part by poor weather conditions and strikes, and many of its companies have benefited from strong export demand. 

GERMAN INDUSTRIAL PRODUCTION (%) – APRIL 2017 TO MARCH 2018

Source: Federal Statistics Office, tradingeconomics.com

US PMI AND TRADE DATA DUE AHEAD OF NEXT WEEK’S FED MEETING

• May’s ISM non-manufacturing purchasing managers’ index (PMI) data is due on Tuesday, an important survey of more than 400 executives on the health of their businesses.

• Amid the headlines around tensions with China, the latest US balance of trade data will be closely scrutinised, following a narrowed deficit in March. 

• The US FOMC meets on 12-13 June, with Bloomberg data showing an 86% probability of a rate hike (as at 4 June).

• The Omnis view: economists remain confident of rate increases in June and September, boosted by last week’s employment data.

US BALANCE OF TRADE ($M) – APRIL 2017 TO MARCH 2018

Source: US Census Bureau

FTSE 100 UP AND POUND DOWN AS UK MANUFACTURING OUTPUT SHRINKS

• UK industrial production fell by 0.8% in May, dragged down by a 1.4% slide in manufacturing.

• Total UK trade deficit widened by £1.9bn to £9.7bn in the three months to April 2018, due mainly to falling exports.

• Weak economic data hit the value of the pound on Monday morning (11 June), though the FTSE 100 rallied as most revenues are generated by these blue-chip companies outside of the UK.

• The Omnis view: uncertainty around Brexit is likely to be a big contributing factor behind the slowdown, though big multinationals listed in the UK are less likely to feel the pinch than smaller domestically focused stocks.

HOUSE OF FRASER AND POUNDWORLD LATEST CASUALTIES OF HIGH STREET SLOWDOWN

• House of Fraser announces 31 store closures and Poundworld goes into administration in tough environment for UK retailers. 

• Maplin and Toys ‘R’ US both fell into administration earlier this year, while other names have cut stores.

• Latest retail sales data for May is due to be released by the Office for National Statistics on Thursday.

• The Omnis view: that the high street is suffering is not new news, and for listed retailers much of the bad news is already priced in to stock valuations. 

TRUMP LASHES OUT AT FELLOW G7 LEADERS AFTER CANADA SUMMIT…

• Trump backtracks on signing a G7 communique covering the need for “free, fair and mutually beneficial trade”.

• US president brands Canadian counterpart Justin Trudeau “very dishonest and weak” after he rejected US demands for a ‘sunset clause’ in the North American trade agreement.

• French president Emmanuel Macron tweets that an “isolated” US faced a “united front” from its allies.

• The Omnis view: while threats of more trade tariffs are worrying for global trade and diplomatic relations, stock markets have not been negatively impacted by the events of the weekend.

…AS EU RETALIATES TO US STEEL AND ALUMINIUM TARIFFS

• From July, the European Commission will push ahead with tariffs on a list of US goods, including whisky, jeans and Harley-Davidson motorbikes.  

• The move is in retaliation to Washington’s 25% tariffs to European steel exports, and 10% tariffs on aluminium, which came into effect on 1 June.

• European commission said it had the full support of all 28 member states to act.

• The Omnis view: this move has been anticipated by markets ever since Trump first announced his metal tariffs on 1 March, while EU officials stressed last week that they wanted to avoid any further escalation or widening of the trade war.

CHINA TRADE DATA BEATS EXPECTATIONS AS IMPORTS JUMP

• China maintained solid export growth of 12.6% in May to $213bn, while imports grew 26% to an all-time high of $188bn, beating analysts’ forecasts.

• The data came as China pledged to its trade partners, including the US, that steps would be taken to increase imports.

• The General Administration of Customs data also showed that the May trade surplus with the US widened to $24.6bn.

• The Omnis view: China is the world’s largest exporter, and has so far been resilient to US trade tariffs. However, the third round of talks between the two countries earlier in June showed few signs of progress in halting a trade war.

LOOKING AHEAD - TALKING POINTS

KEY WEEK FOR BREXIT AS MPS VOTE ON EU WITHDRAWAL BILL

• On Tuesday, MPs will vote on legislation aimed at ensuring a smooth transition after Brexit day on 29 March 2019.

• The EU Withdrawal Bill is back before the House of Commons after 15 defeats by the House of Lords.

• The government could be vulnerable on key measures including the customs union and a requirement for Parliament to have a decisive say over what happens next if it rejects a final Brexit deal.

• The Omnis view: Brexit is back in the spotlight with time running out before October’s EU summit at which both the UK and the EU hope to agree an outline of future relations.

BREXIT IMPLEMENTATION SCENARIOS

Source: Institute for Government analysis

DONALD TRUMP AND KIM JONG-UN SET FOR SINGAPORE SUMMIT

• While many doubted they would happen, the two world leaders have both arrived in Singapore for historic talks, due to begin on Tuesday. 

• Hopes are high that the meeting will kick-start a process that will see North Korea give up its nuclear weapons.

• Pyongyang could also open up the North Korean economy to global trade, though there are no official statistics on its real size.

• The Omnis view: North Korean denuclearisation could be exchanged for economic and diplomatic rewards from the US in the long term.

NORTH KOREA EXPORTS (£M) – 2008 TO 2018

Source: International Trade Centre, tradingeconomics.com

UK INFLATION REMAINS STEADY WHILE UNEMPLOYMENT FALLS

• The UK consumer prices index (CPI) remained at 2.4% in May, according to the Office for National Statistics (ONS).

• Economists had predicted a rise, but falling cost of computer games and confectionary helped offset rising petrol prices.

• Unemployment fell by 38,000 between February and April, remaining at 4.2%, while average earnings rose by 2.8%.

• The Omnis view: it is encouraging that unemployment remains at its lowest levels since 1975, though wage growth is modest, and the UK economy remains fragile.

US UNVEILS 25% TARIFFS ON $50BN ON CHINESE GOODS

• Tariffs are due to come into effect on 6 July and will impact more than 800 products.

• President Trump said the US’s trade relationship with China was “no longer sustainable”.

• China retaliated, saying it will impose an additional 25% tariff on 659 US goods worth $50bn.

• The Omnis view: further tariffs could well come into play over the coming months though we maintain our view that there are no winners from a trade war.

US FED RAISES INTEREST RATES AS BANK OF JAPAN HOLDS STEADY…

• The Federal Reserve raised interest rates for the second time this year, taking the range of its Federal Funds Rate from 1.75% to 2%.

• US officials now expect four interest rate rises this year – meaning rates may raise by another 0.5% by the end of the 2018.

• The Bank of Japan kept its short-term interest rate target at -0.1%, and pledged to guide 10-year government bond yields to around 0%.

• The Omnis view: the world’s major central banks are at different stages of tightening, with the US furthest down the line. However, this has been well signposted by policy makers to avoid market shocks.

…AS ECB CALLS HALT TO QUANTITATIVE EASING

• The European Central Bank’s bond buying programme – current €30bn per month – will be reduced to €15bn a month after September, and ended completely by the close of this year.  

• ECB president Mario Draghi said the programme had succeeded in the aim of putting inflation on course to meet its target of being below but close to 2%.

• Draghi also said there would be no prospect of an increase in the ECB’s key lending rate – currently 0.0% – until next summer at the earliest.

• The Omnis view: this is a positive move from the ECB, though eurozone economies could still be impacted by political issues, with pressure this week on the German coalition government.

CHINA’S INDUSTRIAL OUTPUT AND RETAIL SALES SLOW

• China’s industrial production grew by 6.8% in May from a year earlier, though this was below expectations of 7%.

• This represented the slowest pace of expansion since the National Bureau of Statistics started the series in 1996.

• Retail sales of consumer goods grew 8.5% year-on-year, though this was the slowest pace since June 2003.

• The Omnis view: the Chinese economy is slowing, but this is to be expected given its size and long-term transition to a consumer-led economy.

LOOKING AHEAD - TALKING POINTS

BANK OF ENGLAND SET TO HOLD RATES

• The Bank of England’s Monetary Policy Committee will meet to make a decision on interest rates, having voted seven to two to hold at 0.5% in May.

• As outlined above, inflationary pressures have eased, meaning a rate rise is unlikely this month.

• Some economists doubt interest rates will rise at all this year.

• The Omnis view: with the real impact of Brexit uncertain, policy makers are unlikely to rock the boat by making any shock decisions that could derail the economy.

UK INFLATION RATE (%) – MAY 2017 TO MAY 2018

Source: Office for National Statistics, tradingeconomics.com

ALL EYES ON CENTRAL BANKING FORUM  

• The fourth annual European Central Banking Forum on Central Banking is taking place in Sintra, Portugal.

• The big theme for discussion is on price and wage-setting in advanced economies.

• Speakers include ECB president Mario Draghi – who has overseen 0% interest rates in the eurozone since March 2016 - and US Federal Reserve chair Jay Powell.

• The Omnis view: this is an important summit which gives policy makers an opportunity to shape market expectations on the monetary policy outlook.

EUROZONE INTEREST RATES (%) – MAY 2014 TO MAY 2018

Source: European Central Bank, tradingeconomics.com

‘LAST CALL’ FOR BREXIT AS MAY SET TO OUTLINE THIRD CUSTOMS MODEL

• European Council president Donald Tusk has issued a “last call” to the UK to “lay the cards on the table” if a Brexit deal is to be achieved before October’s deadline.

• Downing Street is believed to have produced a third plan for handling customs after the UK leaves the EU.

• Two previous options, a customs partnership, under which the UK would collect EU import tariffs, and the ‘maximum facilitation’ idea, involving a waiver for entry and exit declarations across the UK border, are both considered unworkable.

• The Omnis view: firm decisions must be made on Brexit with doubts now that a deal will be signed in time for October’s European Council summit. As it stands, markets remain relatively resilient.

UK FIRST-QUARTER GDP REVISED UPWARDS

• Office for National Statistics (ONS) said growth in the three months to March 2018 was 0.2%, up from its previous estimate of 0.1%.

• The ONS said the construction sector had shrunk less than it first thought.

• ONS figures also showed the UK’s services sector rose by 0.3% in April, its fastest pace of growth since November 2017.

• The Omnis view: this is good news for the UK economy, and also raises the possibility that the Bank of England will raise interest rates in August. 

FRAGILE TIMES FOR GERMAN COALITION AS INTERIOR MINISTER OFFERS TO RESIGN

• German interior minister Horst Seehofer offers to step down after disagreements over immigration.

• Seehofer has been pushing chancellor Angela Merkel to agree to a tougher immigration policy.

• The coalition between Merkel’s Christian Democrats (CDU) and the conservative CSU remains fragile following its formation in March.

• The Omnis view: while most expect Merkel to survive this spat with the CSU, the nature of a coalition is that compromises must be made, as the UK and Italy have also discovered.

COMMERCE MINISTER SAYS CHINA WILL WIDEN MARKET ACCESS

• Zhong Shan said China will significantly widen market access and oppose any kind of protectionism.

• An updated list brings the number of areas closed to foreign investment down from 63 to 48.

• Financial markets have been opened up, while China is also lifting investment restrictions on commercial vehicles in 2020 and on passenger cars in 2022.

• The Omnis view: this is a positive stance from China, embroiled in a brewing trade war with the US. However, Chinese officials have historically talked a good game regarding opening up market access, which hasn’t materialised – there is still more to do.

LANDSLIDE VICTORY FOR LEFT-WING CANDIDATE IN MEXICAN ELECTION  

• Andrés Manuel Lόpez is projected to win around 53% following Sunday’s presidential election.

• This sets the stage for the most left-wing government in the country’s democratic history.

• Further tensions with the US are likely (especially considering a revised NAFTA agreement is yet to be agreed) with Lόpez highly critical of Donald Trump.

• The Omnis view: at a time of strained relations between the US and Mexico, some are worried that leftist policies could damage the already sluggish Mexican economy.

LOOKING AHEAD - TALKING POINTS

BUMPER WEEK FOR US DATA AS MARKETS CLOSE FOR INDEPENDENCE DAY

• Analysts are hoping the Institute for Supply Management’s Non-Manufacturing purchasing managers index (PMI) shows increased business confidence.

• US non-farm payrolls and the unemployment rate are due to be released on Friday – jobs growth bounced back at last count in May after two months of lacklustre gains.

• Also on Friday, the US is scheduled to impose tariffs on $34bn of Chinese goods.

• The Omnis view: on Wednesday, stock and bond markets will close for Independence Day, bringing down trading volumes. However, this should not have much impact other global markets.

US ISM NON-FARM PAYROLLS – JUNE 2017 TO MAY 2018

Source: US Bureau of Labor Statistics, tradingeconomics.com

ALL EYES ON CARNEY FOR CLUES ON OUTLOOK FOR UK ECONOMY AND INTEREST RATES  

• Bank of England governor Mark Carney is due to speak in Newcastle on Thursday, where markets will listen closely for clues on his latest take on the UK economy.

• Analysts will also be looking for any commentary on interest rates, with many anticipating a rate rise in August.

• According to Bloomberg, the chances of a rate hike next month are at 66.5% (as of 2 July).

• The Omnis view: while Mark Carney still has plenty of work to do before he steps down in June 2019, thoughts have already turned to his replacement. Carney has been criticised on inconsistencies in communicating policy.

UK GDP GROWTH RATE (%) – MARCH 2015 TO MARCH 2018

Source: Office for National Statistics, tradingeconomics.com

BANK OF ENGLAND HOLDS RATES FOR NOW AS CHIEF ECONOMIST DISSENTS

• The UK base rate was held at 0.5%, but nine-member Monetary Policy Committee (MPC) split 6-3.

• The Bank’s chief economist Andrew Haldane joins two others in voting for a rise to 0.75%.

• MPC says the poor economic growth figures of the first three months of a year was likely to prove "temporary" and that the speed of growth would pick up.

• The Omnis view: this is the first time that Andrew Haldane has dissented from the majority view since he joined the MPC in 2014, leading many to speculate that a rate rise could now happen in August. 

THERESA MAY WINS CRUCIAL BREXIT VOTE AS AIRBUS AND BMW THREATEN TO QUIT THE UK

• The prime minister narrowly fought off a revolt by pro-European Conservatives.

• There was a last-minute concession about the vote MPs will get on the withdrawal agreement or if there is no deal.

• Car giant BMW and plane-maker Airbus, which both employ thousands in the UK, have been warning of the threat of Brexit uncertainty.

• The Omnis view: Brexit uncertainty is already having an impact on corporate decision-making and this will only accelerate as the negotiations drift without resolution.

JAPAN'S INFLATION STAYS WEAK DESPITE STIMULUS MEASURES

• Prices in Japan rose 0.7% in the year to May, unchanged from the April figure.

• The data followed the Bank of Japan's decision to cut its inflation assessment, meaning it will be in no hurry to begin tapering its massive stimulus programme.

• Despite five years of stimulus, inflation remains well below the Bank's 2% target.

• The Omnis view: Bank of Japan governor Haruhiko Kuroda is under pressure again to explain why inflation remains so weak, with Japan out of sync with other major economies on the road to policy normalisation.

EU INTRODUCES RETALIATORY TARIFFS ON US GOODS

• Duties on €2.8bn worth of US goods, including bourbon whisky, motorcycles and orange juice, now come into play.

• European Commission president Jean-Claude Juncker said duties imposed by the US on the EU go against "all logic and history".

• Shares in car manufactures where then hit following a tweet from Donald Trump threatening a 20% tariff on all European cars imported into the US.

• The Omnis view: another week, another trade spat. It remains to be seen whether these pressures will ease, as no country really wants a trade war.

ERDOGAN WINS RE-ELECTION IN TURKEY

• Long-standing leader Recep Tayyip Erdogan has won a new five-year term following Sunday's presidential elections.

• Erdogan secured nearly 53% of almost all votes counted, while his closest rival Muharrem Ince was one 31%.

• The vote ushers in a powerful executive presidency backed by a narrow majority in a 2017 referendum. As part of this, the office of prime minister will be abolished.

• The Omnis view: Turkish markets rallied initially on hopes of increased political stability, but the country remains divided with many fearing this controversial figure's one-man rule.

LOOKING AHEAD - TALKING POINTS

GERMAN BUSINESS AND CONSUMER CONFIDENCE IN THE SPOTLIGHT

• The IFO Business Climate Index measures the sentiment of German entrepreneurs on the current business climate, with data for June due this week.

• This is followed by the GfK Consumer Climate Indicator, which edged down last month as spending slowed.

• German unemployment data for May is also released this week, having fallen to 3.4% in April.

• The Omnis view: Germany remains a driving force behind the eurozone. However, Trump's recent threats to its car manufacturers could be a hit to confidence in the future.

GERMANY GFK CONSUMER CLIMATE INDICATOR – JULY 2017 TO JUNE 2018

Source: GfK Group, tradingeconomics.com

US FINALISED GPD FIGURE AND PERSONAL INCOME AND SPENDING

• A final first quarter growth figure is due for the US, estimated at an annualised 2.2%.

• Consumer confidence data is also due this week, as well as home sales and durable goods orders.

• On Friday, we will see monthly data released on personal income and personal spending, with the later having increased by 0.6% month-over-month in April.

• The Omnis view: the US appears to be in good shape economically, though many fund managers remain wary of expensive stocks.

US PERSONAL SPENDING – MAY 2017 TO APRIL 2018

Source: US Bureau of Economic Analysis, tradingeconomics.com

CUSTOMS BILL NARROWLY PASSES THROUGH PARLIAMENT

• New Brexit Secretary Dominic Rabb disclosed that his department is stepping up preparations for a ‘no deal’ Brexit;

• The Prime Minister yielded to hard-line Brexiteers and included four amendments to the Customs Bill that parliament narrowly passed on Tuesday;

• In his resignation speech, former Foreign Secretary Boris Johnson told MPs that ‘it’s not too late to save Brexit’ as he positioned himself as leader of the Leave faction;

• Omnis view: As deadlines loom, confrontation between the opposing factions is likely to become more common. However, parliament breaks up for its summer recess on Tuesday so expect a lull over the next six weeks.

LATEST RELEASE SHOWS UK ECONOMIC DATA SOFTENING 

• Inflation unexpectedly softened to 2.4% in June, as falling prices for food and clothes offset rising transport costs;

• Wage growth slowed slightly to an annual rate of 2.5% between March and May, even though unemployment fell to 4.2% over the same period;

• Retail sales unexpectedly fell by 0.5% in June compared to May, reversing strong growth in the previous two months. 

• Omnis view: Despite weaker-than-expected data, the BoE is forecast to raise interest rates in August. Higher interest rates and continued uncertainty over Brexit are likely to weigh on UK growth.

TRUMP MEETS PUTIN IN HELSINKI

• The US president met his Russian counterpart on Monday, reporting afterwards that Putin strongly denied meddling in the 2016 US presidential election;

• Democrats and Republicans criticised the President for effectively disregarding his own intelligence services and threatened new sanctions against Moscow;

• Trump then claimed he misspoke in his first interview following the summit and accepted US intelligence’s conclusion.

• Omnis view: Although Trump’s u-turn limited the damage to a degree, concerns over his relationship with Russia persist, adding to the current sense of elevated political risk.

FED CHAIR OFFERS CONTRASTING VIEW TO TRUMP 

• Federal Reserve Chairman Jay Powell testified in front of the US Senate on Tuesday, arguing that trade tariffs could hinder growth and claiming he does not see the EU as a foe;

• The International Monetary Fund suggested tariffs introduced by President Trump could reduce global growth by 0.5% by 202;

• Trump defied convention by publicly stating he is “not thrilled” by the Fed’s tightening of monetary policy. Nonetheless, the Fed is widely expected to continue gradually raising interest rates as US economic data remain firm.

Omnis view: The prospect of escalating trade tensions adds an element of uncertainty to an otherwise positive near-term outlook for the US economy. However, the Fed’s ability to manage its tightening cycle is likely to be equally important to investors, if not more so.

JAPAN SIGNS TRADE DEAL WITH EU

• Japan and the EU signed the world’s largest bilateral trade deal on Tuesday, creating a trade zone that incorporates about a third of global gross domestic product (GDP);

• Japan reported a $6.4 billion trade surplus in June, bouncing back from a deficit the previous month, as exports rose by 6.7% and imports by 2.5%;

• Japan’s annual core inflation picked up slightly in June to 0.8%, largely driven by the rise in oil prices;

• Reuters reported that the Bank of Japan (BoJ) has been discussing potential changes to its quantitative easing programme. 

• Omnis view: From a global growth perspective, it is positive that Japan and the EU are bucking the protectionist trend spearheaded by the US. Meanwhile, there are tentative signs of improvement in the outlook for the Japanese economy, raising the prospect that the BoJ will join other major central banks in moving away from extraordinarily loose monetary policy.

LOOKING AHEAD – KEY TALKING POINTS

KEY ECONOMIC STATEMENTS FROM ECB AND US

• The European Central Bank (ECB) is expected to leave interest rates unchanged when it meets on Thursday;

• US GDP data are published on Friday, with economists predicting an annualised rate of 4.2% for the second quarter as the Trump administration’s fiscal stimulus takes effect.

• Omnis view: While the eurozone continues to recover from a weak first quarter, a significant gap remains with US economic growth. This has recently been – and may remain – a major support for the dollar, in spite of President Trump’s efforts to talk down the US currency.

US DOLLAR INDEX, 31 DECEMBER 2016 – 23 JULY 2018

Source: Bloomberg

BUSY WEEK FOR CORPORATE EARNINGS

• A number of companies post second-quarter results this week, including some of the tech industry’s biggest players; 

• Alphabet is expected to report strong results today, followed by Facebook on Wednesday, Amazon on Thursday and Twitter on Friday;

• The auto industry is also strongly represented, with General Motors, Ford and Fiat Chrysler all posting results on Wednesday.

• Omnis view: US corporate earnings are likely to remain strong, boosted by tax cuts and robust economic growth. The auto industry will be closely monitored for indications of how escalating trade tensions may impact the real economy.

BREXIT NEGOTIATIONS TO INTENSIFY OVER COMING MONTHS

• The EU’s chief negotiator Michel Barnier met with UK Brexit Minister Dominic Raab, pledging to ‘negotiate continuously’ as the two sides try to come to an agreement over the next few months;

• The British government published 20 technical notes covering the potential consequences of a ‘no deal’ Brexit. Raab played down the prospect, while Foreign Secretary Jeremy Hunt appealed to the EU to take a constructive approach to negotiations;

• EU financial services chief Valdis Dombrovskis welcomed the City of London’s proposal to align its financial regulations with the EU after Brexit (known as equivalence), but he warned access to the single market could not be taken for granted;

• Omnis view: A report released by the International Monetary Fund last month argued that a ‘no deal Brexit’ would impact Europe, although to a lesser extent than the UK. We think it is in the best interests of both parties to reach an agreement. We remain underweight UK equities, but we believe prices reflect a reasonable degree of pessimism. Any softening of the rhetoric could therefore see domestic UK equities rally and sterling rebound.

TRUMP CRITICISES THE FED AS TRADE TALKS RESUME WITH CHINA

• US President Donald Trump criticised the Federal Reserve for raising interest rates and accused China and Europe of manipulating their currencies, both of which reduce the impact of trade tariffs;

• Low-level trade talks resumed between the US and China. However, little progress was made as the US side blamed China for failing to address its fundamental concerns;

• Meanwhile, the US imposed tariffs of 25% on $16 billion of Chinese goods, outlined a few months ago, and China responded in kind;

• Omnis view: The markets seem to be waiting for any indication President Trump is softening his stance with China. He might agree trade deals with other countries, but he is unlikely to back down with China ahead of the midterm elections. That means the next round of tariffs on $200 billion of Chinese goods may go into effect by the start of September. We expect this to further dent sentiment towards emerging markets (EMs).

POSITIVE OUTLOOK FOR US ECONOMY AS BULL MARKET HITS RECORD

• The S&P 500 hit a record high, propelled by strong corporate earnings and President Trump’s tax cuts, as the post-crisis recovery became the longest-running bull market on record;

• According to the minutes from the Federal Reserve’s latest meeting, a positive outlook for the US economy increases the likelihood of two more interest rate hikes this year. Nonetheless, some policymakers worried that rates would be too low to cut if faced with a recession;

• Addressing the annual Jackson Hole meeting of central bankers, chairman Jay Powell said the Fed does not expect the US economy to overheat, and he defended its gradual approach to raising interest rates;

• Omnis view: A robust US economic outlook should be positive for global growth and risk assets, including equities, but recent weeks have demonstrated the extent of the imbalances engendered by this outlook, with the strength of the dollar creating issues for a number of EMs and dominating the performance of many international financial markets. However, we expect US leadership to lessen, relieving some of these pressures to a degree.

TRUMP RULES OUT CONCESSIONS TO TURKEY AS CHINA AND VENEZUELA LAUNCH STIMULUS

• In Turkey, the lira weakened against the US dollar, and the economy continued to struggle, as President Trump refused to ease sanctions and tariffs on the country;

• The People’s Bank of China injected $22 billion into the Chinese banking system, as it sought to overcome slowing growth by increasing the availability of credit to companies and local governments;

• Venezuela tried to curb spiralling inflation by devaluing its currency, cutting fuel subsidies and raising the minimum hourly wage. It pegged the bolivar to the ‘petro’, a state-managed digital currency which the government claims is backed by oil, gas, gold and diamonds;

• Omnis view: Our portfolios have limited exposure to Turkey, either directly or through European companies with interests in the country. While we do not see Turkey’s troubles spilling into other EMs, there is a risk in pushing such a strategically-located partner towards Russia. We retain overweight positions in EMs and still believe valuations are attractive, supported by decent fundamentals.

ITALIAN GOVERNMENT BONDS RALLY AMID CONCERN OVER RISING BORROWING COSTS

• Italian government bonds rallied after ratings agency Moody’s put off a decision about downgrading the country’s credit rating;

• Italy called on the European Central Bank to carry on with its bond-buying programme amid fears that borrowing costs could increase once the stimulus ends in December;

• Elsewhere in the EU, Prime Minister Alexis Tsipras welcomed the end of Greece’s third and final bailout, but he warned of further challenges as his government prepares another tight budget for 2019;

• Omnis view: As the third largest economy in Europe, we will be monitoring volatility in Italy’s government bond market and the potential impact on sentiment elsewhere in the eurozone. It is likely to continue until the coalition government agrees its first budget. However, our portfolios have limited exposure to Italian bonds.

LOOKING AHEAD - TALKING POINTS

JAPAN AND EU PUBLISH UNEMPLOYMENT FIGURES

• Japan releases its unemployment figure for July on Friday, with the consensus view that it will remain unchanged at 2.4%;

• The EU also announces its monthly unemployment rate for July, and economists expect little or no change to the current rate of 8.3%;

• Omnis view: Despite tightening global labour markets, there has been limited evidence of sustained and significant wage growth or inflation so far. This should permit monetary policy to remain relatively accommodative.

EURO AREA UNEMPLOYMENT RATE (1995-2018)

Source TRADINGECONOMICS.COM and Eurostat

Although it may not be obvious, bond yields have important consequences for equity markets. Firstly, the availability of a higher yield on bonds may encourage some investors to sell equities and buy bonds. Secondly, bond yields are a key input to a number of widely used equity valuation models. In these models, as bond yields rise, equity prices fall.

You may be wondering how this correction could affect your portfolio. The key message is to remain calm. Markets rarely move upwards uninterrupted, as they are prone to spells of volatility. However, the portfolios are designed to weather short-term market fluctuations by holding a mix of assets that are proven to deliver returns over the long term.

Furthermore, the portfolios are designed to suit your attitude to risk. Adventurous portfolios are designed to accept greater short-term uncertainty in the pursuit of higher long-term returns. Meanwhile, though not entirely immune from short-term market moves, Cautious portfolios are designed to deliver returns that are less susceptible to short-term market weakness.

The message remains the same: trust in the diversification of your portfolio and remain focused on your long-term objectives.

UNITED STATES: FED FORECASTS UPWARD TRAJECTORY FOR INTEREST RATES

• US equities rallied, but the US dollar stayed flat, as the Federal Reserve raised interest rates to a target range of 2% to 2.25%;

• The latest hike was the eighth in the current cycle, and the third in 2018, and the Fed hinted that it would increase rates once more this year and three times in 2019;  

• Fed Chair Jay Powell hailed the strength of the American economy and acknowledged concerns about trade tariffs, but he argued they did not appear to be making an impact yet;

• Omnis view: While this hike- and arguably the next one- are already priced into the markets, the most useful take away from the Fed’s latest meeting could be the forward guidance it provided for the monetary tightening cycle in 2019. We will be watching corporate bonds as the tightening cycle in the US progresses. If the economy slows then stress may become evident for companies at the lower end of investment grade.

EUROPE: EURO WEAKENS FOLLOWING ITALIAN BUDGET U-TURN

• The euro rose against the US dollar and EU sovereign bond yields climbed at the start of the week, as European Central Bank President Mario Draghi said higher wage growth resulting from a tightening labour market should spur inflation;

• The euro handed back some of those gains, and Italian bond yields jumped, as the country’s populist coalition government unexpectedly announced it plans to increase fiscal spending in its upcoming budget, although it will not breach EU rules on its budget deficit;

• The euro weakened further against the US dollar following Friday’s release of eurozone core inflation data which fell short of forecasts;

• Omnis view: The Italian coalition government caught the markets by surprise after hinting at a more prudent fiscal policy in the run-up to its budget announcement. This u-turn might lead to tension between Italy and the EU and impact sentiment towards the region. However, a weaker euro could boost exports which is one of the main drivers of EU economic growth.

UNITED KINGDOM: RELATIVE CALM AS BREXIT DEADLINE APPROACHES 

• It was a relatively quiet week by Brexit standards, which helped sterling recover ground against the US dollar following the turbulence triggered by the Salzburg summit;

• Omnis view: Our base case remains that a soft Brexit is most likely, possibly followed by a harder Brexit at a later stage. However, once the November deadline passes we should have greater clarity about the outcome, which to a certain degree markets will welcome regardless of what kind of deal is agreed.

EMERGING MARKETS: ARGENTINA SECURES IMF LOAN

• The peso fell against the US dollar as Luis Caputo, Argentina’s central bank President who advocated intervention in the currency markets, resigned after only three months in the job;

• The peso then rebounded as Caputo’s resignation allowed talks to progress about accelerating the distribution of a $50 billion loan from the International Monetary Fund (IMF) which prefers free-floating currencies;

• Ultimately, the IMF increased the loan to $57 billion and agreed to let Argentina receive a bigger share of the money before the end of 2019;

• Omnis view: While Argentina’s economic woes are contained, these positive developments should boost sentiment to emerging markets (EMs) as a whole and support the sector’s fledgling oversold rally.

COMMODITIES: OIL PRICE RALLY COULD BOOST UK AND EM EQUITIES

• Oil hit a multi-year high of $82 per barrel following a meeting of the Organization of the Petroleum Exporting Countries (OPEC) at the end of the previous week;

• OPEC members decided against raising production at the meeting, despite an appeal by US President Donald Trump to dampen the price by increasing output;

• Omnis view: Rising oil prices could be good news for the energy-heavy FTSE 100 and may also support the recent rally in EM.

LOOKING AHEAD - TALKING POINTS

ECONOMIC DATA: US TO RELEASE MONTHLY LABOUR MARKET DATA

• The non-farm payroll (NFP) report is released on Friday, with the consensus view that the number of jobs added to the US economy in September will fall slightly from the previous month;

• Omnis view: The Fed closely monitors the labour markets when deciding about interest rates, but a small drop in the monthly NFP report is unlikely to change its current trajectory.

COMPANIES: THIRD QUARTER CORPORATE EARNINGS SEASON STARTS 

• Pepsi, Tesco and Costco are among the big names announcing third-quarter results this week;

• Omnis view: Financial analytics firm Factset is forecasting a slowdown in the estimated earnings growth rate to 19.3% in the third quarter from around 25% in the previous quarter, which may serve as a headwind for global equity markets.

US CORPORATES WILL HAVE TO DELIVER SOLID EARNINGS TO JUSTIFY THE GROWING VALUATION PREMIUM

Global trade: No sign of a break in trade tensions ahead of midterms  

• US President Donald Trump followed through on his pledge to impose trade tariffs on another $200 billion worth of Chinese goods, starting at 10% and rising to 25% in 2019 if the two sides do not come to an agreement in the meantime;  
• China retaliated with its own round of tariffs of between 5% and 10% on $60 billion of American products and accused the US of a lack of ‘good faith’ in trade negotiations; 
• Tech stocks weighed on the US markets at the start of the week, but they rebounded after certain consumer electronic products were exempted from US tariffs;   

United Kingdom: Mixed week for sterling driven by economic data and Brexit 

• Sterling rallied against the US dollar and the euro as inflation hit its highest level in six months and growth in retail sales exceeded expectations for the three months to August; 
• Sterling then fell after the EU rejected the economic proposals in Prime Minister Theresa May’s Chequers plan at its leader’s summit in Salzburg; 

Emerging markets: Oversold rally due, but out of EM’s control  
• The lira strengthened as the Turkish government published its medium-term economic plan which included a more prudent approach to infrastructure investment; 
• India announced a series of import restrictions in an effort to support the rupee and narrow its current account deficit; 
• The Russian rouble also rose, partly driven by higher oil prices (see Commodities); 

European Union: Italy reassures markets on government spending 

• Italian markets rallied as Finance Minister Giovanni Tria eased concerns about government spending, acknowledging the coalition must reduce debt and manage the budget deficit; 

Commodities: Rally in oil prices boosts EM and UK markets  

• Oil advanced after Saudi Arabia announced it was comfortable with the price rising above $80 per barrel and US inventories fell to their lowest level since 2015 ; 
• The price of industrial metals including copper and zinc rose as demand from China held up, despite the latest round of trade tariffs; 
• Omnis view: While oil has boosted some EMs, it could also be acting as a catalyst for the UK markets as the oil and gas sector is heavily-weighted on the FTSE 100.    

LOOKING AHEAD - TALKING POINTS

Central banks: Federal Reserve expected to raise rates 

• The Fed is widely expected to raise interest rates to 2.25% at its meeting on Wednesday; 

 
Federal Open Market Committee member expectations for the trajectory of US interest rates

European Union: Italy to announce budget outline 

• The Italian coalition government will publish its budget outline on Thursday, including its eagerly anticipated fiscal plans; 

UK POLITICS: ENCOURAGING REMARKS FROM THE EU BOLSTER PRIME MINISTER

• Sterling strengthened on Monday as the EU’s chief Negotiator Michel Barnier claimed a Brexit deal could be agreed by November;
• In a further boost for Prime Minister Theresa May, outgoing European Commission President Jean-Claude Juncker hailed her Chequers proposal as a starting point for a post-Brexit free trade area;
• Eurosceptic Conservative MPs met on Tuesday to discuss replacing the Prime Minister, although leading Brexiteers including David Davis and Jacob Rees-Mogg expressed their support for Mrs May, claiming they believe she is doing a good job and they only disagree with her Brexit policy;
• Eurosceptic Tories abandoned plans to publish their blueprint for the UK’s relationship with the EU after Brexit due to differences over key issues, but they did outline a proposal for managing the Northern Irish border;
• Bank of England (BoE) Governor Mark Carney warned government ministers a ‘no deal’ Brexit might lead to turbulence in the UK economy, including a material drop in house prices, but he suggested growth could outperform current forecasts if a deal is agreed based on the Chequers proposal;

UK ECONOMY: BANK OF ENGLAND LEAVES RATES UNCHANGED, COMMITS TO GRADUAL TIGHTENING 

• The BoE’s Monetary Policy Committee voted unanimously to keep interest rates at 0.75% following its meeting on Thursday and committed to gradually increasing rates subject to a ‘smooth adjustment’ to Brexit;
• There was good news for the UK economy as wage growth picked up in the three months to July, increasing 2.9% on an annualised basis;
• The unemployment rate remained at a record low of 4% over the same period, according to the Office for National Statistics;

GLOBAL TRADE: TRADE TENSIONS BETWEEN US AND CHINA CONTINUE TO SIMMER

• US Treasury Secretary Steve Mnuchin sought to arrange a meeting with senior Chinese officials in an effort to defuse trade tensions before President Trump imposes the next round of tariffs on $200 billion of Chinese goods;
• However, President Trump adopted a contradictory tone, expressing indifference to any meeting with China tweeting that the US is under ‘no pressure to make a deal’;
• Research by the US chambers of commerce in Beijing and Shanghai showed over 60% of US companies operating in China have been affected by trade tariffs, and a third are considering moving their manufacturing out of the country;
• China asked the World Trade Organisation for permission to impose sanctions on the US of $7 billion per year in response to a dispute about anti-dumping duties stretching back to 2013;
• Meanwhile, the US hopes to agree at least a partial trade deal with the EU by November, and Mexico’s Finance Minister said his country is willing to sign a bilateral trade pact with the US if Canada cannot negotiate terms for its continued participation in the North American Free Trade Agreement;

EU: CONCERNS EASE OVER ITALIAN BUDGET AS EUROPEAN CENTRAL BANK KEEPS INTEREST RATES ON HOLD

• Italian Foreign Affairs Minister Enzo Moavero eased concerns about the country’s upcoming budget, signalling the coalition government intends to comply with EU rules on spending;
• The European Central Bank decided to leave interest rates unchanged at its meeting on Thursday and until the summer of 2019 at the earliest, and it confirmed it will reduce its programme of quantitative easing to €15 billion from October before bringing it to a halt at the end of the year;
• There was no clear winner in the Swedish elections, as the centre-left and centre-right parties ended up with a similar number of seats and no majority, meaning the populist Sweden Democrats could influence the formation of the next government;

EMERGING MARKETS: CURRENCIES CREATING HEADACHES FOR POLICYMAKERS

• Turkey’s central bank defied President Recep Erdoğan and raised interest rates to 24% to combat spiralling inflation and to strengthen the Turkish lira which has weakened considerably against the US dollar this year;
• As expected, Argentina’s central bank decided to leave interest rates unchanged at 60% and announced it intends to maintain the same rate until December at the earliest;
• Elsewhere in emerging markets (EMs), the Russian rouble weakened to its lowest level since 2016 amid concerns about the independence of the country’s central bank, while election uncertainty put pressure on the Brazilian real;

LOOKING AHEAD - TALKING POINTS

ECONOMIC DATA: INFLATION DATA IN THE UK AND INTEREST RATES IN JAPAN

• UK inflation is expected to tick up when the Office for National Statistics publishes August’s annualised figure on Wednesday;
• The Bank of Japan announces its latest interest rate decision on Wednesday, while Japanese balance of trade data is released on Wednesday followed by inflation data on Friday;

JAPANESE CONSUMER PRICE INFLATION (%, YEAR-ON-YEAR)

EU LEADERS MEET ON WEDNESDAY

• EU leaders meet in Austria on Wednesday for a two-day summit, where they will discuss their plans for agreeing a Brexit deal with the UK by November;  
• The Prime Minister will also update her EU counterparts about her Brexit plans at the meeting;  

MARKETS: EQUITIES RATTLED BY TIGHTENING MONETARY CONDITIONS

• US equities fell to their lowest level in eight months on Wednesday, and Asian and European equities followed them down on Thursday; 
• One of the main catalysts for the sell-off was concerns that rising interest rates could slow economic growth, with the tech sector among the hardest hit; 
• US equities staged a tentative rally on Friday, as the tech sector rebounded, although financials lagged despite strong third-quarter earnings from several investment banks (see ‘Corporate earnings’); 
• Omnis view: US President Donald Trump blamed the Federal Reserve for this correction, but his tax cuts have contributed to the thriving US economy which the Fed is trying to keep under control by tightening monetary policy. Nevertheless, the markets are starting to accept the upward trajectory of interest rates.

UK: RHETORIC SOFTENS AS DEADLINE APPROACHES FOR WITHDRAWAL DEAL

• Sterling rallied on Tuesday as rumours circulated that the UK and the EU could agree a withdrawal deal in a matter of days; 
• According to reports, the two sides made significant progress on a potential solution to avoid a hard border in Ireland; 
• Omnis view: Rhetoric seems to be easing as we approach the deadline to secure a deal, which markets welcomed. There is still a lot of negotiating ahead, so we would not expect a deal until close to the deadline.

CHINA: ARE TRADE TARIFFS STARTING TO TAKE EFFECT?

• Chinese equities slipped as the People’s Bank of China responded to weak investment and manufacturing data by reducing reserve requirement ratios in an effort to boost liquidity in its banking sector; 
• Omnis view: It is unlikely the current tariffs will be enough to force Beijing to the negotiating table. We do not expect the two sides to make progress ahead of the US midterm elections at the start of November, although President Trump may increase the pressure on China via further announcements.

EUROPE: ITALIAN BOND MARKET VOLATILE AS BUDGET DEADLINE LOOMS

• Yields on Italian government bonds hit a four-year high as deputy Prime Minister Matteo Salvini aggravated tensions over the coalition’s upcoming budget by accusing EU officials of being ‘enemies of Europe’; 
• Omnis view: The EU’s deadline for Italy’s draft budget is today, and the prospect of further volatility in the country’s assets depends on the fiscal spending plans submitted by the coalition government.

EMERGING MARKETS: BOLSONARO WINS FIRST ROUND OF BRAZILIAN PRESIDENTIAL ELECTION

• Brazilian assets rallied as far-right candidate Jair Bolsonaro triumphed in the first round of Brazil’s presidential election; 
• Bolsonaro will face leftist opponent Fernando Haddad of the Workers’ party in the second round of the election at the end of October; 
• Emerging market (EM) equities were dragged down by the negative sentiment around developed markets, but they recovered before the end of the week; 
• Omnis view: Putting Bolsonaro’s politics to one side, political stability in one of the biggest EM economies should improve sentiment to the sector as a whole.

CORPORATE EARNINGS: US BANKS BEAT EXPECTATIONS 

• JP Morgan, America’s biggest bank, beat forecasts when it reported its third-quarter results on Friday, boosted by strong performance in consumer banking; 
• Wells Fargo and Citigroup also exceeded analyst expectations in the latest quarter; 
• Omnis view: Financials set the tone for earnings season, so Friday’s results look promising. However, concerns about rising interest rates- as demonstrated last week- could temper the impact on equity markets.

COMMODITIES: DROP IN OIL PRICES WEIGHS ON EQUITIES

• Oil prices hit a four-year high of over $86 on Wednesday before concerns about weaker demand dragged them below $80, as the International Monetary Fund lowered its global economic growth forecasts for 2018 and 2019; 
• Gold rallied as investors headed for what are traditionally considered safe haven assets amid the market volatility; 
• Omnis view: Falling prices put further pressure on equities, particularly the energy-heavy FTSE100, although emerging markets like China and India should welcome cheaper oil.

LOOKING AHEAD - TALKING POINTS

ECONOMIC DATA: UK, CHINA AND JAPAN TO PUBLISH INFLATION FIGURES

• The UK announces August’s unemployment rate on Tuesday followed by September’s inflation figure on Wednesday; 
• China releases September’s annual inflation data on Tuesday and its third-quarter gross domestic product (GDP) growth rate on Friday; 
• Japan publishes September’s balance of trade data on Thursday and September’s inflation data on Friday; 
• Omnis view: China’s GDP growth rate may provide some indication of the effect of trade tariffs on the country’s economy.

POLITICS: ITALY AND BREXIT TOP THE EUROPEAN POLITICAL AGENDA

• The Italian coalition government must submit the draft proposal for its 2019 budget to the EU today; 
• The European Commission summit takes place on Thursday, where leaders hope to draft a political declaration covering the future relationship between the UK and EU; 
• Omnis view: The markets will closely monitor events in Europe for any potential effect on the region’s bonds and currencies, while the rhetoric coming from the EU leaders’ summit could impact UK assets.

COMPANIES: ANOTHER BUSY WEEK FOR CORPORATE EARNINGS

• Financials dominate reporting season again this week, with Goldman Sachs, Morgan Stanley and Bank of New York Mellon set to publish third-quarter results; 
• Omnis view: Following last week’s correction, markets may look to corporate earnings for a catalyst to help global equities rebound.

UK: MIXED WEEK FOR STERLING AS BREXIT UNCERTAINTY RESURFACES

• Sterling weakened at the start of the week following Brexit Minister Dominic Raab’s one-hour meeting with Michel Barnier, the EU’s chief negotiator; 
• Raab told Barnier that the UK could not agree to the withdrawal deal at the EU leader’s summit on Thursday, and the talks ended in stalemate; 
• Sterling rallied later in the week as data released by the Office for National Statistics showed wages grew at the fastest pace since the financial crisis in the three months to the end of August; 
• Omnis view: Brexit-related uncertainty appears to have returned. European leaders cancelled a special Brexit summit planned for November, putting pressure back on Mrs May to come up with a solution acceptable to both her own party and the EU.

US: TECH SECTOR HELPS EQUITIES STEM LOSSES

• US equities regained some of the ground lost in the recent sell-off, driven by a tech sector rally and upbeat corporate earnings (see ‘Corporate earnings’ below); 
• The US dollar softened as September’s retail sales data missed expectations, but it recovered after the release of the minutes from the latest Federal Reserve meeting, which hinted interest rates would hit 3% by the end of 2019; 
• Omnis view: As the stock market corrected due to concerns over rising rates, the tech sector emphasised its influence by leading the markets down and back up again. Third-quarter corporate results could dictate the trajectory of US equities in the coming months, though upcoming mid-term elections add an element of uncertainty to the outlook.

EUROPE: TENSIONS OVER ITALIAN BUDGET SET TO CONTINUE

• Italian assets rallied as the country’s coalition government submitted its draft budget, including proposals to increase fiscal spending, to the EU ahead of the deadline on Monday; 
• Brussels’ rebuke led to a couple of days of volatility, but Italian assets rallied again as Pierre Moscovici, the EU Economic Commissioner, sought to defuse tensions by claiming he wanted to ‘maintain a constructive dialogue’ with the country’s government; 
• Omnis view: Despite the conciliatory comments from Moscovici, market turbulence could continue as the Italian coalition, which may struggle to agree on its next steps due to internal divisions, is unlikely to back down.

CHINA: THE DELICATE BALANCING ACT CONTINUES

• Despite data showing that China’s economic growth slowed in the third quarter, equities rallied as the country’s regulators said they were ready to implement measures to support the economy; 
• The renminbi fell to its lowest level against the US dollar since the start of 2017, although the US Treasury declined to label China a currency manipulator; 
• Omnis view: The Chinese authorities have been trying to address concerns over the amount and quality of debt in the economy. While these efforts were expected to slow the economy, the imposition of trade tariffs has made the balance more fragile.

CORPORATE EARNINGS: ENCOURAGING START AS MARKETS AWAIT FAANGS

• Goldman Sachs and Morgan Stanley maintained the good run of third-quarter results for the financial sector as both beat forecasts; 
• Shares in Netflix, the first of the FAANG group of tech stocks to announce earnings, jumped as the company reported strong subscriber growth; 
• Omnis view: Results so far have generally been encouraging, but it is early days yet. Considering the influence of the tech sector, markets will be eagerly anticipating results from the rest of the FAANGS (See ‘Looking ahead’ below).

COMMODITIES: GEOPOLITICS AND INVENTORIES DRIVE OIL PRICES

• Oil prices rose at the start of the week as Saudi Arabia warned of economic retaliation if the US imposed sanctions over the disappearance of journalist Jamal Khashoggi; 
• However, they retreated on Wednesday after the Energy Information Administration published data showing US stockpiles rising faster than expected; 
• Omnis view: As the world waits for Saudi Arabia’s explanation for the disappearance of Khashoggi, the oil market appears to be focusing on fundamental drivers of supply and demand.

LOOKING AHEAD - TALKING POINTS

EUROPE: ITALIAN BUDGET RESPONSE AND ECB INTEREST RATE DECISION

• Italy must respond by noon on Monday to the EU’s claim that the country’s draft budget breaches fiscal spending rules; 
• The European Central Bank (ECB) is expected to leave interest rates unchanged when it announces its latest decision on Thursday;

Corporate earnings: FAANGS and British banks to report 
• Amazon and Alphabet are the next of the FAANG stocks to report earnings, while Barclays, Lloyds and Royal Bank of Scotland kick off the season for UK banks;

The shares of Alphabet, Amazon and Netflix have outpaced the US equity market over the past five years

Some of the main announcements were:

• The personal allowance will be raised to £12,500 from April 2019, one year earlier than planned. The higher rate threshold will also rise to £50,000 from April 2019, also a year earlier than planned, and will remain at the same level in 2020/21.

• The lifetime allowance for pension savings will increase to £1,055,000 for 2019/20 in line with CPI.

• The national living wage will increase from £7.83 an hour to £8.21.

• The annual investment allowance (AIA) will increase to £1 million for all qualifying investments in plant and machinery made on or after 1 January 2019 until 31 December 2020.

• For entrepreneurs’ relief, the minimum period throughout which the qualifying conditions for relief must be met will be extended from 12 months to 24 months from 6 April 2019.

• From 1 April 2020, companies will be subject to a 50% limit on the proportion of annual capital gains that can be relieved by brought-forward capital losses. Companies will have unrestricted use of up to £5 million capital or income losses each year. 

• Business rates bills will be cut by one-third for retail properties with a rateable value below £51,000 for two years from April 2019.

• Capital gains tax lettings relief will only apply where the owner of the property is in shared occupancy with the tenant. The final period exemption will also be generally reduced from 18 months to nine months

• The VAT registration threshold be maintained at the current level of £85,000 until April 2022.

• From 1 April 2020, the amount of payable research and development (R&D) tax credits that a qualifying loss-making company can receive in any tax year will be restricted to three times the company’s total PAYE and NICs liability for that year.

• From 6 April 2020, when a business enters insolvency, HMRC will be a preferred creditor for taxes collected by the business for the government such as VAT, PAYE income tax, employee NICs, and construction industry scheme deductions – but not such taxes as corporation tax and employer NICs.

• Large social media platforms, search engines and online marketplaces will be pay a 2% tax on the revenues they earn which are linked to UK users from April 2020.

• Fuel duty was frozen, alongside beer and spirits.

Our full bugdet notes are located here:

UK: STERLING REMAINS SENSITIVE TO BREXIT RHETORIC

• Sterling was up over the course of the week as the chances improved of a soft Brexit;
• In the event of an orderly Brexit, the Bank of England said it would need to gradually raise interest rates to 1.5% over the next three years to keep inflation under control;
• Standard and Poor’s warned a ‘no deal’ Brexit might lead to a recession and a lowering of the UK’s credit rating, although it expects the two sides to reach an agreement during the transition period;
• Omnis view: Once again, sterling showed its sensitivity to Brexit rhetoric. Volatility should continue in the coming weeks as the deadline approaches to agree a withdrawal deal.

US: CONFLICTING MESSAGES FROM WHITE HOUSE ABOUT TRADE PROGRESS

• US equities rallied after US President Donald Trump tweeted that he held ‘a long and very good conversation’ with Chinese Premier Xi Jinping ‘with a heavy emphasis on trade’, but they retreated as White House advisor Larry Kudlow denied a draft trade plan was in the works;
• The US dollar strengthened as the non-farm payroll report showed 250,000 new jobs were created in October, the unemployment rate stayed at 3.7%, and annualised hourly wage growth grew by 3.1%, its fastest pace since 2009 ;
• Omnis view: President Trump’s comments about trade could be timed to boost the Republican party ahead of the midterm elections, so whether the two sides make any progress remains to be seen. Meanwhile, another round of strong economic data increases the likelihood of rising interest rates.

CORPORATE EARNINGS: MIXED RESULTS SUGGEST EARNINGS MIGHT HAVE PEAKED

• Facebook and Apple both beat earnings forecasts in the third quarter, but Apple shares fell as a result of a downbeat outlook for the fourth quarter and plans to reduce transparency in future reports;
• Shares in General Motors (GM) rallied as it exceeded earnings and revenue expectations and issued a positive outlook for the fourth quarter;
• Omnis view: Earnings season has not been a disaster, but companies may struggle to continue expanding at the current pace with economic growth peaking and trade tensions lingering.

CHINA: BEIJING HINTS AT FURTHER STIMULUS TO BOLSTER ECONOMY

• Chinese equities rallied as the government hinted further stimulus was likely to support the country’s slowing economy, as factory output sank to its lowest level in two years;
• Omnis view: Signs that trade tariffs appear to be taking their toll might encourage Beijing back to the negotiating table, while the prospect of government intervention may improve sentiment towards emerging markets.

EUROPE: ECONOMIC GROWTH SLOWS IN THIRD QUARTER

• The euro softened against the US dollar as GDP data showed eurozone economic growth slowing in the third quarter and on an annualised basis;
• Omnis view: Headwinds for the eurozone economy include Italy’s confrontation with the EU over its draft budget and sluggish car production in Germany due to new emissions tests.

EMERGING MARKETS: BOLSONARO VICTORY BOOSTS BRAZILIAN ASSETS

• Brazilian assets rallied as Jair Bolsonaro, the populist right-wing candidate, won the second round of the country’s presidential election;
• Omnis view: Now the election is over, attention will turn to Bolsonaro’s policies, with particular focus on his pledge to address the budget deficit and who he appoints to head Brazil’s central bank.

LOOKING AHEAD - TALKING POINTS

ECONOMIC DATA AND MONETARY POLICY

• The markets will watch closely for any impact of tariffs when China publishes October’s balance of trade, export and import data on Thursday;
• The Federal Reserve is expected to leave the interest rate unchanged following its meeting on Thursday;
• China releases October’s annualised inflation rate on Friday.

US MIDTERM ELECTIONS

• The midterm elections take place on Tuesday, with the outcome likely to have a major impact on US politics for the remaining two years of President Trump’s term.

Source: https://fivethirtyeight.com

US: EQUITIES RALLY IN AFTERMATH OF MIDTERMS

• US equities rallied after the midterm elections, as the Democrats won control of the House of Representatives and the Republicans increased their majority in the Senate; 
• The Federal Reserve left interest rates unchanged following its meeting on Thursday but issued an optimistic outlook for the US economy, increasing the likelihood of a hike in December. 
• Omnis view: The midterm elections failed to spring any surprises, which US equities welcomed. However, the prospect of further fiscal stimulus faded due to the split, so the country’s economic growth rate may slow. Meanwhile, a stronger US dollar in response to expectations of tightening monetary policy will not help economic activity.

BREXIT: STERLING WEAKENS AS MINISTER RESIGNS

• Sterling weakened against the US dollar at the end of the week as Jo Johnson, the remain-supporting brother of Boris, resigned from cabinet in protest over the government’s handling of Brexit negotiations and called for a second referendum.
• Omnis view: Sterling will remain sensitive to Brexit developments. We still believe the UK will agree some sort of deal with Europe.

EUROPE: ITALIAN ASSETS UNDER PRESSURE AS ROME REFUSES TO CONCEDE OVER BUDGET

• Yields on Italian government debt rose as the EU warned that Italy’s budget deficit would breach its 3% limit in 2020; 
• Italy’s bank index fell as Goldman Sachs downgraded some of the country’s biggest lenders to a ‘sell’ rating. 
• Omnis view: Rome is refusing to back down to the EU for now, so Italian equities and bond yields should remain volatile ahead of the deadline on the 13th November to resubmit the draft budget.

COMMODITIES: OIL STARTING TO WEIGH ON EQUITY MARKETS

• Oil prices continued to fall, as news of rising US stockpiles offset an earlier report that the Organisation of Petrol Exporting Countries (OPEC) and its allies were considering cutting production in 2019. 
• Omnis view: Oil prices have been on a downward trajectory since the start of October, and the effect particularly weighs on the energy-heavy UK equity indices.

LOOKING AHEAD - TALKING POINTS

ECONOMIC DATA

• The Office for National Statistics publishes the UK’s unemployment rate for September on Tuesday and October’s inflation rate on Wednesday; 
• The markets will closely monitor Wednesday’s release of US inflation data for October for any impact it may have on the monetary policy tightening cycle.

• The deal covers the terms under which the UK will leave the EU: the financial settlement, residency rights, a backstop to avoid a hard border in Northern Ireland and the transition period;
• It does not establish the future trading relationship between the two sides, but it includes a statement outlining a trade deal;
• The UK cabinet approved the deal following a lengthy meeting on Wednesday 14^th November;
• Mrs May must now bring the deal to parliament where she will need to secure the support of a majority of MPs;
• Parliamentary approval is, at present, far from assured and three cabinet ministers have already resigned. The date for the vote has not been confirmed;
• The EU will hold a special summit on Sunday 25^th November to formalise the deal; 
• UK government bonds rallied on the morning of Thursday 15^th November and sterling weakened against the US dollar;
• Stocks deemed exposed to the domestic economy drifted lower, though broader measures of the UK stock market were little changed;
• UK assets could remain volatile ahead of the parliamentary vote.

A withdrawal agreement between the UK and the EU would be an important milestone but only the first step in a Brexit process which does not yet seem to have a definite end date. Our portfolios are globally diversified, so they remain well positioned to weather short-term volatility in UK assets. Unless we end up with an extreme outcome, clarity should prove supportive for domestic assets.

BREXIT: DRAFT WITHDRAWAL DEAL TRIGGERS VOLATILITY IN UK ASSETS

• The UK and EU agreed a draft withdrawal deal on Tuesday, covering the financial settlement, residency rights and the Irish border;

• The UK cabinet approved the deal on Wednesday, but several ministers resigned in protest on Thursday;

• While the initial market reaction to the agreement was muted, the subsequent political turmoil prompted more pronounced market moves: UK government bonds rallied, sterling weakened against the US dollar and shares of domestic-focused UK companies drifted lower.

• Omnis view: The Prime Minister must now bring the deal to parliament where approval is far from assured (a date for the vote has not been confirmed yet), while the EU has arranged a special summit on 25th November. UK assets could remain volatile in the meantime.

US: TECH SECTOR WEIGHS ON US EQUITIES

• US equities began the week on the back foot, dragged down by the tech sector as downgrades to forecasts by two of Apple’s key suppliers raised questions about demand for the iPhone;

• The market later rebounded as rising oil prices buoyed the energy sector.

• Omnis view: Last week’s movements in the US equity markets appear to be primarily sector-driven (see ‘Commodities’ section below). However, investors may also be turning their attention back to the underlying causes of volatility in October, as the turbulence around the midterm elections fades.

EUROPE: ITALY FAILS TO REVISE BUDGET AHEAD OF DEADLINE

• The euro weakened against the US dollar, and yields on Italian sovereign debt rose, as the country’s coalition government resubmitted effectively the same draft budget to the EU on Tuesday;

• The EU rejected the original budget submission, citing a “particularly serious non-compliance” with EU rules.

• Omnis view: The EU could launch what is known as an excessive deficit procedure against Italy, which may lead to financial sanctions. With neither side seemingly prepared to back down, Italian assets are likely to remain volatile in the short term.

GLOBAL TRADE: US AND CHINA RESUME TALKS

• The US and China resumed trade talks ‘at all levels’ ahead of a meeting between US President Donald Trump and his Chinese counterpart Xi Jinping at the G20 summit at the end of November.

• Omnis view: The timing of this latest announcement provided some support for US equities. From a Chinese perspective, concerns about slowing economic growth and the impact of trade tariffs could have forced Beijing back to the negotiating table.

COMMODITIES: FLUCTUATING OIL PRICES IMPACT EQUITIES

• Oil prices tumbled on downbeat projections for global economic growth at the start of the week, but they recovered slightly following reports that OPEC and its allies were considering cutting production.

• Oil prices continue to influence equity markets, particularly the energy-heavy UK and US indices.

LOOKING AHEAD - TALKING POINTS

EU TO ANNOUNCE ITALIAN SANCTIONS

• The EU will announce what action, if any, it will take against Italy for breaching fiscal spending rules in its draft budget on Wednesday.

ECONOMIC DATA

• Japan releases its annualised inflation rate for October on Wednesday.

JAPAN INFLATION RATE

The ONS survey reveals 91% of eligible employees are now contributing to a pension but only 63% have realised they are doing so. If you aren’t eligible, you can still ask to join the pension scheme if you wish. Auto-enrolment means that workers aged between 22 and state pension age and earning over £10,000 are automatically opted in to their employer’s workplace pension scheme. Currently those enrolled must pay in at least 3% of your earnings and employers must pay in 2%. From April 2019 individuals must pay in minimum 5% and employers 3%.

In the example below, you can see the pension contributions based on a 35-year-old woman earning £35,000 per year and paying contributions based on qualifying earnings of £28,968 per year (Earnings before tax up to a maximum limit of £46,350 per year less the lower earnings threshold of £6,032)

If you're a man born on or after 6 April 1951 or a woman born on or after 6 April 1953, you'll receive the new State Pension at retirement. The maximum is currently £164.35 per week for the 2018/19 tax year (The actual amount you receive will depend on your individual national insurance contributions).

By staying opted-in to your company pension scheme you will also receive extra income from the contributions you and your employer have made whilst you are in work (plus any growth).

Automatic enrolment makes joining and staying in a pension scheme as easy as possible. The contributions that you and your employer pay will automatically be invested along with any tax relief and if you change employers you can take your pension pot with you to combine with your new employers pension or if you choose you can leave it where it is.

Where ever you are with your retirement planning get in touch to talk to us about your options.

The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.

MONETARY POLICY: FED CHANGES TONE

• US equities rallied as Federal Reserve chairman Jay Powell said interest rates are approaching the neutral rate- the level that neither boosts or slows economic growth- and insisted ‘there is no pre-set policy path’; 
• The previous month Powell talked about rates probably being a ‘long way’ from neutral. 
• Omnis view: Powell’s comments suggest the Fed may slow the pace of monetary tightening in 2019, although a rate hike remains likely at its December meeting.

GLOBAL TRADE: TRUMP AND XI AGREE TO EASE TENSIONS

• At a meeting after the G20 summit, US president Donald Trump agreed to refrain from raising existing tariffs, while his Chinese counterpart Xi Jinping committed to reducing the trade deficit by increasing purchases of American farm, energy and industrial goods. 
• Omnis view: Progress is positive, but there are further hurdles to overcome. The US could escalate tariffs if China fails to address concerns about alleged technology theft within three months, so uncertainty about global trade will continue to hover over the markets.

BREXIT: STERLING VOLATILE AMID DOWNBEAT OUTLOOK FOR UK ECONOMY

• Separate reports by the government and the Bank of England suggested the draft Brexit deal could reduce UK economic growth by up to 4%; 
• However, sterling rallied as the damage to the UK economy would be much greater in case of a ‘no deal’ Brexit. 
• Omnis view: Sterling should continue to be volatile ahead of the meaningful vote on 11th December, as Prime Minister Theresa May tries to convince MPs to back her deal. As things currently stand, it looks unlikely that enough MP’s will vote in favour of the Prime Minister’s plan in order to approve it.

EUROPE: ITALY AND EU EDGE CLOSER TO DEAL ON DRAFT BUDGET

• Italian assets rallied following reports that the coalition government might be prepared to compromise on its draft budget; 
• The country’s deputy prime minister Luigi Di Maio hinted that fiscal spending plans could be revised to reduce the proposed budget deficit which breaches EU rules. 
• Omnis view: Italian rhetoric appears to be softening after the EU rejected the country’s draft budget twice and raised the prospect of imposing financial penalties.

COMMODITIES: OIL PRICES FALL AHEAD OF OPEC MEETING

• Oil prices weakened in response to rising US stockpiles and doubts over whether Saudi Arabia would cut production, although Russia provided some respite after the country’s energy minister said it would cooperate with OPEC. 
• Omnis view: The markets will closely monitor OPEC’s meeting on 6th December when members will discuss reducing global supplies.

LOOKING AHEAD - TALKING POINTS

ECONOMIC DATA

• The US publishes November’s non-farm payroll report on Friday; 
• China releases November’s import, export & balance of trade data on Saturday and inflation rate on Sunday.

OPEC MEETING

• The Organisation of Petroleum Exporting Countries (OPEC) starts its final two-day meeting of the year on Thursday.

Brent crude oil price year to date (source: ft.com)

Income Multiples

From the perspective of a mortgage adviser, the affordability for mortgages isn’t as bad as what individuals imagine it to be.  With a 95% Loan To Value (LTV), for £237,500 costing around £1,000 per month, which isn’t a complete stretch for First Time Buyers (FTB).  The issue here is the income multiples which lenders use to judge the amount of loan they will lend.  With average income multiples looking to be approximately 4.5 times annual gross salary, the amount the lender will lend to FTBs, who are generally on starting salaries, is not in line with affordability of these mortgages.  A FTB purchasing on their own would require an annual gross salary of £50,000 and relativity debt free in order to be lent £225,000.  Income multiples were set back 2014[2] in a bid to stop rising house prices. Despite this, since 2014 house prices have risen by 124% compared to an increase of 118% between 2005 and 2014, suggesting that this measure has not been effective[3].  Some would argue that this policy has only priced FTBs out of the market, as they do not have any equity to put as a deposit and generally will have low starting salaries.  A survey run by HSBC on millennials found that 2/3rds who didn’t own a home put it down to their salaries not being high enough[4].

A recent article by the Guardian puts this into perspective extremely well saying “Houses are also less affordable than ever before: in 1990 houses cost just under 3.5 times the average salary; today it’s more than five times the typical salary, rising to more than 10 times in London.”[5]

House Prices

What exaggerates this situation further is the fact that house prices in London and the surrounding areas are becoming astronomical.  The average flat price in October 2018 being £414,067[6], meaning with a 5% deposit, first time buyers are looking at annual gross salaries of £90,000 or £45,000 each for two buyers in order to be lent the amount of money required to purchase.  A report by the National Housing Federation Home Truths says that the average Londoner would need a salary increase of 282% in order to afford a house[7].

Further, a report by Thinktank shared in the Guardian on 17^th April 2018[8] suggested that half of the millennial generation will be renting until their 40s and 1/3 will never own their own home.  Another shocking fact is shown through a survey carried out for the Local Government Association by estate agents, found that just 20% of 25 year olds own their own property, down from 46% 20 years ago[9].  This isn’t for the fact that millennials don’t want to buy a property with 74% of millennial non-owners intending to buy in the next 5 years[10].  This demonstrates that FTB are being priced out the market with the vast, ever-growing housing prices.

Houses are not worth what they are put on the market for

The market is mainly increasing due to individuals believing their home is worth more than what it actually is.  Ultimately, a house is worth what someone is willing to pay for it.  However, when houses are priced well it should take about 3-10 days in order to find a buyer[11], whereas an overpriced house will take a lot longer, creating extreme inefficiency in the market.  Commonly, it takes approximately 2 to 3 months to sell a home in the UK[12] and on average are being sold for 96.7% of the asking price, with this decreasing further to 95.6% in the capital[13].  This illustrates how homes are being marketed for more than they are worth, which is causing huge efficiency problems and causing issues for the FTB.

Deposit

With almost half of all young people going onto higher education[14] and gaining the average of £44,000 debt that comes with this[15], most have little to no deposit to put forward to purchase for the first time.  This means that FTBs must typically save for ten years in order to save for a deposit in London[16] and this amount is set to hit £250,000 by 2027[17].  The extreme house prices mean that the deposits required are greater. This, accompanied with student debt and low starting salaries means the market is becoming extremely tough to move in to.

Positives

It’s not all doom and gloom, the number of FTB’s is at its highest point for 10 years[18] and house prices on average have fallen in London from October 2017 to October 2018 by 1.7%[19]. The Evening Standard even reports that Brexit could pull house prices down for the first time since 2009[20].  Further, the draw of not being within a chain and not having to suffer the inefficiency this causes is a huge pull for sellers.  In some cases, this means FTBs are able to purchase for up to 10% less than the asking price.  Moreover, the government have released a number of initiatives in order to help FTBs move onto the property market

Government Initiatives

Back in 2015 the government released the Help to Buy ISA in which FTBs could save money each month and receive a bonus on these contributions in order to help with a deposit.  This has since been replaced by the Lifetime ISA, in which FTBs can save up to £4,000 and receive a 25% bonus on top of these funds from the Government.  This policy has gone down extremely well with FTBs and many have done the wise thing and deciding to take one out.  There are some rules about how and when you are allowed to use the funds, so my advice would be to make sure you are fully aware before opening one, but open one sooner rather than later (even if it’s only with £1!).

Prior to this in 2013, the Help to Buy: Equity Loan was introduced in which the FTB would need a 5% deposit and the government would then loan 40% in London boroughs and 20% elsewhere interest free for 5 years.  This loan is only available on newbuild properties and the government benefit from any increase in the house price should the FTB decide to sell[21].  This initiative meant the FTB could have a greater deposit, therefore gaining greater purchasing power and better interest rate deals.  Phillip Hammond stated in the Autumn Budget of 2018 that this scheme will be extended to 2023[22].

There are also a few more schemes that have been introduced such as Shared Ownership, Right to Buy and Shared Equity Schemes all with the underlying motivation to help FTB’s move onto the property ladder.  The latest, announced in the 2017 Autumn Budget came in two parts, firstly removing Stamp Duty for the first £300,000 on properties worth under £500,000 and secondly by promising to build more homes in the right places by making £15.3 billion available over the next 5 years[23].  The first of these has come under large scrutiny with the OBR (Office for Budget Responsibility) saying straight after the announcement that the cut will push prices up[24] and has since been proven right by information released by the Mortgage Advice Bureau a month later[25].  However, this legislation has saved FTB’s up to £5,000 on Stamp Duty which ultimately is good thing.

Understanding of the Property & Mortgage Market

With all these issues faced, the greatest is definitely the FTB’s understanding of the property and mortgage market and how to get the best for their money.  The complexity and lack of education in this area means that a lot of FTB’s are looking towards Mortgage Advisers for guidance during this process.  As a Mortgage Adviser, I cannot solve the issue of astronomic house prices, the income multiples and sellers trying to sell their home for more than they are worth.  However, I am able to explain the different Government initiatives and the different types of mortgage products available and how each can work together to give the best solutions designed to each individual’s specific needs.  I am able to act as a point of contact, to guide you through this process and find you the best deal on the market for your unique needs.

If you would like me to help you, or someone you know, move onto the property ladder then do not hesitate to contact me on 07966 204 599 or via email at pe@bsgfs.co.uk and I will be more than willing to assist you.

I look forward to speaking to you.

Peter Edwards CII (MP)

Mortgage & Protection Adviser

Your home may be repossessed if you do not keep up repayments on your mortgage

An ISA is a medium to long term investment, which aims to increase the value of the money you invest for growth or income or both. The value of your investments and any income from them can fall as well as rise. You may not get back the amount you invested

Where can I find a lender? What type of rate is best for me? What rate can I get? What can I afford? How do I apply? How can I know I fit the lender criteria? How long does it take? What if there’s a problem with my application?

And the list goes on! As Mortgage Advisers, it is our job to know the answers to these questions and to guide you through the process. I suppose a lot of people may ask ‘but why  should I use a Mortgage Adviser?’ and it is a fair question! I have been reflecting on the service we as Mortgage Advisers offer and hopefully the below serves as a list of reasons why you should consider using one.

• Comparison
  Mortgage Advisers have access to deals from a range of lenders, which means you may be able to get a more competitive deal and this could end up saving you thousands of pounds. At BSG we have access to over 50 of the UKs best known and also specialist lenders, which enables us to provide a comprehensive offering to our clients.

• Unique circumstances
  It is a Mortgage Advisers job to understand lenders criteria and be able to find you a mortgage deal that you are most likely to be accepted for. This can be very beneficial for clients whose situations are a little ‘out of the ordinary’, for example those who are on fixed term employment contracts or perhaps those who are borrowing into retirement. The chances are, we’ve seen your situation before and are in a great position to help you get the mortgage you need.

• Exclusive deals
  Being an intermediary means that we are able to access ‘intermediary exclusive’ deals from lenders. A number of lenders offer exclusive products from time to time as they recognise the specialist knowledge that intermediaries have regarding mortgages. This gives our clients access to deals that they wouldn’t be able to get if they were arranging their mortgage themselves.

• Convenience
  We are here to make the mortgage application process as efficient as possible for our clients and take away all of the legwork both in terms of the research and application. After an initial meeting where you would provide details about your circumstances and a number of documents, this should sufficiently equip a Mortgage Adviser with the tools to research lenders and ultimately submit an application further down the line.

• Advice
  Whilst the above factors I’ve spoken about support our cause and are great reasons to use a Mortgage Adviser, it is advice which is truly at the heart of everything we do and what I believe is most valuable to our clients. A Mortgage Adviser will make a recommendation to you after looking at your needs by considering an array of factors such as; your affordability, your attitude towards stability and certainty and your long term plans. This allows clients to feel confident that they have the right mortgage which completely aligns to their circumstances.

Here at BSG, we pride ourselves on providing high quality advice to our clients and hope to make the process of securing a mortgage as simple as possible. We ensure that our clients can make informed financial decisions and provide the advice to enable them to achieve their financial objectives.

If you are planning to buy your first home, or a new home and think that you would like to benefit from any of the points above then please get in touch and we will be happy to help. Why not try our new Live Chat facility? Message us anytime between 9am and 5.30pm for an instant reply.

We look forward to hearing from you!

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

References
https://www.money.co.uk/mortgages/mortgage-broker-or-direct-deal.htm
https://www.moneywise.co.uk/mortgages/home-mortgage/how-and-when-to-use-mortgage-broker
https://www.moneyadviceservice.org.uk/en/articles/choosing-a-mortgage-shop-around-or-get-advice

With the average Standard Variable Rate being 4.9%, the average 2-year fixed rate deal 2.51% and five-year fix rate deal 2.92% in December 2018[1], this means that around 3.5 million people are paying an extra 2.39% or 1.98%. 

To put this numerically, for an outstanding mortgage amount of £200,000 this equates to an additional £4,780 or £3,960 a year.

I will start by saying there are some very good reasons for being on a Standard Variable Rate such as there are generally no Early Repayment Charges and there are typically no arrangement fees.  Ultimately, they provide you with flexibility

However, for people who plan on living in the same property for the next 2, 3+ or even 5 years then there has never been a better time to change to a fixed rate deal.  This is because the gap between the average maturing two-year fixed rate mortgage & lenders’ standard variable rate hit its highest level since February 2008.  For example, if you were set up with a 2-year fixed rate deal in early 2017 your interest rate will almost double when it expires this year.  This shows how important it is to shop around to find the competitive deal for you and your needs.

If you do not know if you are on a Standard Variable Rate then you are not alone, many people across the country are unsure.  There are a few ways to tell:

1)    Did your mortgage payment increase in November or December 2017 and September or October 2018?

2)    How long have you had your mortgage product?  If you have had a mortgage product with the same lender for over 5 years then it is likely you are on their Standard Variable Rate

3)    Have a look at your last annual mortgage statement.  It will say the product you are on and the interest rate you are paying.

4)    If you are still unsure, call your mortgage lender and they will be able to tell you.

In fact, 81% of British people believe their mortgage lenders quietly hope they will slip onto a Standard Variable Rate[2].  So, it is definitely worth checking and seeing if you are able to save yourself hundreds of pounds.

If you are on or about to go onto a Standard Variable Rate and want to have a discussion about how if we are able to save you money then please use our live chat to talk to one of our Mortgage Advisers or call us on 01923 853 080.

However, the biggest question people are finding is which one shall I take out as I cannot use both to purchase my first home?

Ultimately, for me, it comes down to one question, “Do you think you will purchase a property within the next year?”  If the answer is yes, then Help To Buy ISA is the right way to go, if not then the Lifetime ISA should work out better.

This is also the case if you currently have a Help To Buy ISA and are debating transferring this into a Lifetime ISA. 

If you are not sure then I will strongly advise that you open a Lifetime ISA today – even with £1 – in order to get that year clock started.  I have previously outlined how long it can take to not only source, but complete on a mortgage!

Help To Buy ISA

The Help To Buy ISA was launched on 1^st December 2015 with the aim to provide First-Time Buyers the opportunity to save up to £200 a month with the government topping up their contributions by 25%, up to a maximum of £3,000.  The Conservative government introduced the policy in order to help with the growing issue which was labelled “Generation Rent”.  This policy has proved very popular with the latest figures saying that just below £170,000 properties have completed using the scheme.[2]

Naturally the biggest benefit of this scheme is that it encouraged FTB’s to start saving towards purchasing their first home, however, the scheme is not without its negatives. 

Firstly, the maximum house price in order to be able to use the scheme is £250,000 (£450,000 in London boroughs).  Typically, this should be high enough – especially with Lenders income multiples, which I speak about in an early blog – however, if you are purchasing in the suburbs of London, or in and around cities such as Manchester, Liverpool or Leeds, then it would be unlikely the property would meet this criterion.

Secondly, you are unable to use the bonus as part of your exchange deposit as the bonus is paid on completion.  Therefore, as the Telegraph reported, experts rendered this scheme technically useless.[3]

Due to these negatives the Help To Buy ISA has since been replaced by the Lifetime ISA, so you will be unable to open one after the 30^th November 2019[4] and can only save until 30^th November 2029 when accounts will close to additional contributions.  The Bonuses can be claimed until the 1^st December 2030.

Lifetime ISA

Introduced in George Osbourne’s Budget speech in 2017, the Lifetime ISA was bought in to replace the Help To Buy ISA.  The basic aim was to improve on the negatives of the Help To Buy ISA, for example the £450,000 maximum price was expanded to the entire of the UK. 

Secondly, the bonus from the Government was greater, with savers being able to contribute up to £4,000 every tax year and the government remained giving 25% of the contribution. 

Thirdly, as pointed out above the bonus could only be used towards the completion deposit and not the exchange deposit.  The Government introduced this in order to prevent savers from taking the bonus and then pulling out of purchasing the house.  Instead, with the Lifetime ISA the bonus is paid annually but the Government introduced the penalty – I talk about below – in order to counteract the issue with people using the product in a manner in which it was not designed.

Fourthly, the Lifetime ISA is available to anyone aged 18-39, not necessarily FTB’s.  Although, the idea is that savers would use the scheme to purchase their first home it also had the secondary purpose to help people save for their retirement.  This led to many smart home owners, taking out a Lifetime ISA and using it as a secondary pension as gaining a guaranteed 25% return is unbeatable in the market.

Fifthly, with the Help To Buy ISA, savers could only save monthly and could not save lump sum amounts.  This is not the case with the Lifetime ISA as savers can deposit as much or as little as they would like up to the limit of £4,000.

Sixthly, the Help To Buy ISA was only available as a cash saving – the top price being Barclays at 2.58% AER Variable.  The Lifetime ISA is available as both a cash saving and has the ability to be invested within the Stock Market.  This has enabled savers to have the potential to gain, using historical data, returns above inflation.  As a lot of savers would be circa 5-10 years away from purchasing their first home, this means they can not only achieve a 25% guaranteed return but the potential to gain good capital growth as well.

The Lifetime ISA is not without its negatives, the biggest being the penalties for taking your money out without purchasing your first home or before you are aged 60.  You are also able to withdraw the money without penalty if you are terminally ill and have a life expectancy of less than 12 months.  The Penalty is a 25% charge including the government bonus, which causes an effective 6.25% loss – assuming no capital growth.  I will explain this numerically.

Saver’s Investment: £4,000

Government Bonus: £1,000

Total Invested: £5,000

Therefore, a 25% charge would be £1,250.  Hence, the saver would return £3,750 from the £4,000 they invested.

Another downside to the Lifetime ISA is the simply fact they have to open a year before being able to use them.  This has left many savers frustrated as they have been saving into their Lifetime ISA and now being unable to use them.  Therefore, my advice is to open a Lifetime ISA as soon as possible in order to start that 1 year clock.

If you are worried about locking in your money and would prefer the access to it, should you require it, then open the account with only £1.

Unsure about which one would be correct for you, then see the straight forward table below – taken from Money Saving Expert[5]:

The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.
If you are still unsure about which ISA would be the correct one for you, then do not hesitate to speak to one of our Mortgage Advisers on 01923 852 080.  Alternatively, send us a message using our Live Chat!

Past Performance is not a reliable indicator of future performance and should not be relied upon

1. Save, save and then save a little more!

This really is the first step towards buying your own home. You’ll need at least 5-10% of the property purchase price to put down as a deposit. Ultimately the bigger your deposit the better; you’ll have a smaller mortgage which means paying less interest over the term and it may mean access to a more competitive interest rate….result!

Check out my colleague’s blog which discuss the government saving schemes supporting first time buyers – the Help to Buy ISA and the Lifetime ISA.

2. Mortgage research

I would suggest speaking to a mortgage adviser as soon as you begin thinking about buying your first home. A mortgage adviser can provide a realistic indication as to what you may be able to borrow based on your income and expenditure. This will help you to determine how much deposit you require and the value of properties you could consider. They’ll also be a useful point of contact to have throughout the whole process. You could also visit your bank to discuss your mortgage options and have a look online. Remember that this is likely to be the biggest financial commitment you’ll ever make, so receiving advice can be hugely beneficial and help save you money in the long run.

3. Begin your property search

You’ve probably heard of the following websites and they are are often a good place to start to get a feel for what is out in the market within your budget:

- https://www.rightmove.co.uk/

- https://www.onthemarket.com/

- https://www.zoopla.co.uk/

You should also visit estate agents in areas that you think you’d like to buy. By doing this you’ll get a feel for the local area and you can build a relationship with the agent who may then be able to contact you when properties come to market that fit your criteria, possibly before they appear on the sites mentioned above.

4. Make an offer

Once you have found a property that you like you can make an offer and this is usually done through the estate agent. Sometimes your first offer won’t be accepted but remember that you and the seller are both negotiating for the best price.

5. Instruct your solicitor and apply for the mortgage

Now you’ve had an offer accepted it is time to instruct your solicitor or conveyancer to begin all the legal work. They will be responsible for a number of things including drafting contracts, performing Land Registry & Local Authority searches and checking planning history.

Now is also the time to get in touch with your Mortgage Adviser. Once they have presented their mortgage recommendation to you, they will submit your application to the lender. The lender will be looking to assess the following within a mortgage application:

- You as the applicants: the lender will want to assess a number of aspects of your  situation including: your affordability by verifying your income and existing committed expenditure; your track record with managing money e.g. running a credit check and assessing your bank statements) and the source of your deposit.

- The property: lenders will want to ensure that the property is a suitable security for the mortgage and most do this by conducting a Mortgage Valuation. This is a basic valuation and purely for the lender’s purposes only.

Once a lender has made their assessments and completed underwriting, hopefully you’ll be in the position where you are issued with a mortgage offer along with all the terms and conditions of your mortgage.

6. Arrange a survey

It is highly advisable that you arrange a survey on the property as this can help to avoid hidden costs in the long term. If the survey uncovers problems with the property that creates an additional cost, you could ask the seller to lower the purchase price by that much. There are a number of surveys available:

- RICS condition report – this is the cheapest and most basic survey. These are normally most suitable for new-build and conventional homes in good condition. No advice or valuation is provided in this survey.

- RICS homebuyer report – this is likely to be most suitable for conventional properties in a reasonable condition. This is a much more detailed survey, looking thoroughly inside and outside a property, which also includes a valuation

- Building or structural survey – this is the most comprehensive survey and suitable for all residential properties. This type of survey would be good for older homes or homes that might need repairs.

7. Exchange of contracts

This is when you will sign the contract and exchange with the seller. Usually you’ll be required to put down a deposit which is most likely to be 10% of the total price. At this stage the buyer and seller are committed to the sale, pulling out of the deal now means that you’re likely to lose your deposit.

It is very important that Buildings insurance and Financial Protection policies are in place from exchange of contracts. Your Mortgage Adviser would be able to assist you in making sure you have the necessary provisions in place at this point.

8. Completion

This is the exciting day when you finally become the new legal owner of the property. Your solicitor will be moving the funds across to the seller, after which you will be able to get the keys and will officially be a homeowner! You will need to pay the solicitor their fees and if you are required to pay Stamp Duty this is usually something which your solicitor will arrange.

As you can see, there a number of elements to the process and it may well be a stressful time trying to get everything aligned and sorted. At BSG, our fully qualified Mortgage Advisers strive to take the stress out of the process where we can and are there to support our clients throughout.

If you’re wanting to buy your first home or thinking about moving to your next home, then please get in touch – we would love to help!  Why not try our new Live Chat facility? Message us anytime between 9am and 5.30pm for an instant reply.

We look forward to hearing from you!

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.

http://www.bbc.co.uk/consumer/23623491

https://www.moneyadviceservice.org.uk/en/articles/money-timeline-when-buying-property-england-wales--n-ireland

https://www.your-move.co.uk/buy/guides/house-buying-process-england-and-wales

• Sterling weakened against the US dollar on Wednesday after a series of ‘indicative votes’ failed to secure a majority for any of the alternatives to the Prime Minister’s withdrawal deal;
• Among the most popular proposals were a customs union and a referendum on the final deal;
• There was further bad news for sterling on Friday when Parliament rejected Mrs May’s deal for a third time- by a smaller margin than before- despite her offer to resign if it passed.

Markets: Concerns over global growth push bonds higher

• A downward revision to US economic growth in the final quarter of 2018 put further pressure on treasuries which had rallied due to concerns about the global outlook and the likelihood of an interest rate cut by the Federal Reserve.

Trade: US and China resume talks

• US equities rallied after Treasury Secretary Steve Mnuchin described last week’s trade talks with China as constructive and Beijing granted two US firms access to its financial markets.

Trade: China raises tariffs on US goods
• US equities fell at the start of the week after China raised tariffs on an additional $60 billion worth of American
goods;
• US President Donald Trump’s optimistic tone in a series of tweets on Tuesday helped equities rebound, but
his decision to blacklist Chinse tech company Huawei weighed on markets at the end of the week.
• Omnis view: The markets also welcomed President Trump’s pledge to delay tariffs on car imports for six
months, although he was trying to avoid a confrontation with Europe and Japan who would be subject to the
same tariffs.
Performance of the S&P 500 for the week commencing 13th May 2019 (source: ft.com)
UK: Sterling weakens as talks end
• Sterling weakened to its lowest level against the US dollar this year as Labour pulled out of cross-party talks
with the government, which had not made any meaningful progress;
• Labour leader Jeremy Corbyn claimed the talks had ‘gone as far as they can’ and signalled his party would
oppose the Prime Minister’s withdrawal deal at the next parliamentary vote, pencilled in for early June.
• Omnis view: The uncertainty about the Prime Minister’s future seems to be the latest obstacle to an
agreement, as Labour fears that Mrs May’s replacement could undo any deal she negotiates.

LOOKING AHEAD - TALKING POINTS

Economic data
• Monday – Japanese Q1 2019 economic growth
• Wednesday- Japanese imports, exports and balance of trade for April; UK inflation rate for April;
• Friday- Japanese inflation rate for April.

Monetary policy
• Wednesday- minutes released from the latest Federal Reserve meeting

European elections
• The UK goes to the polls in the European elections on Thursday 23rd May.

Omnis Investments is now tweeting daily updates. Follow us at: @OmnisInvest

This update reflects Omnis’ view at the time of writing and is subject to change.
The document is for informational purposes only and is not investment advice. We recommend you discuss any investment decisions with your Openwork financial adviser. Omnis is unable to provide investment advice. Every effort is made to ensure the accuracy of the information but no assurance or warranties are given.

Trade: China intensifies rhetoric
• US stocks fell on Thursday after the Chinese media branded the US the ‘biggest troublemaker in the international community’;
• Markets stabilised going into the weekend as US President Donald Trump sounded optimistic about trade talks resuming and suggested that Chinese tech company Huawei could be included in the final deal;
• Earlier in the week, President Trump issued a license allowing US companies to continue doing business with Huawei for three months.
• Omnis view: A breakthrough looks unlikely at this point, but a proposed meeting between President Trump and his Chinese counterpart Xi Jinping at the G20 summit at the end of June may give both sides an incentive to make progress over the coming weeks.

LOOKING AHEAD - TALKING POINTS

Economic data
• Friday- Japanese unemployment in April.

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Managed Investments ICVC and the Omnis Portfolio Investments ICVC is Omnis Investments Limited (Registered Address: Washington House, Lydiard Fields, Swindon, SN5 8UB) which is
authorised and regulated by the Financial Conduct Authority. Omnis Investments Limited does not offer investment advice nor make recommendations regarding investments. Potential investors
are particularly advised to read the specific risks and charges applicable to the Funds which are contained in the Prospectus and Key Investor Information Documents (KIIDs).
Omnis Investments Limited is registered in England and Wales under registration number 06582314 (Registered Office: Washington House, Lydiard Fields, Swindon SN5 8UB).
Omnis Investments is now tweeting daily updates. Follow us at: @OmnisInvest
This update reflects Omnis’ view at the time of writing and is subject to change.
The document is for informational purposes only and is not investment advice. We recommend you discuss any
investment decisions with your Openwork financial adviser. Omnis is unable to provide investment advice. Every effort is made to ensure the accuracy of the information but no assurance or warranties are given.

Trade: Broadening of tensions weighs on US equities

• US equities fell after US President Donald Trump claimed the US was not ready to agree a trade deal and warned tariffs on Chinese goods could increase substantially;
• China responded by threatening to limit the export of rare earths- metals used widely in the technology industry- in which it dominates supply;
• There was further pressure on US assets at the end of the week when President Trump threatened to impose tariffs on Mexican goods unless the country makes a greater effort to stem illegal immigration.

• Omnis view: Economic data suggest President Trump’s trade policy is impacting global growth: the broadening of tensions is therefore something of a concern. However, it is unclear whether these threats form part of his economic strategy, negotiation tactics or political positioning ahead of next year’s presidential election.

Performance of the S&P 500 for the week commencing 27th May 2019 (source: ft.com)

UK: Sterling falls as Brexit uncertainty intensifies

• Sterling weakened to its lowest level against the US dollar since the start of January as the Brexit party’s success in the European elections put pressure on candidates in the Conservative party leadership contest to take a harder line on the UK’s departure from the EU.

• Omnis view: The results of the European elections, together with the Conservative party leadership contest, have increased Brexit uncertainty. While Brexiter Boris Johnson is favourite to be the next Prime Minister, his minority government might face an immediate vote of no confidence if he pursued a ‘no deal’ Brexit that the majority of MPs oppose.

Europe: Salvini revives budget dispute with EU

• Yields on Italian government bonds rose after deputy Prime Minister Matteo Salvini renewed a confrontation with the EU over the country’s budget;
• Brussels subsequently wrote to the Italian government, asking why it had not made more progress towards complying with EU rules governing debt levels.

• Omnis view: The two sides appeared to have settled their differences at the end of 2018, but the League’s success in the European elections has emboldened Salvini. Disciplinary measures could follow.

LOOKING AHEAD - TALKING POINTS

Economic data

• Tuesday- EU unemployment rate in April;
• Thursday- US imports, exports and balance of trade in April;
• Friday- US non-farm payrolls and earnings in May.

Monetary policy

• Tuesday- Reserve Bank of Australia interest rate decision;
• Thursday- European Central Bank interest rate decision;
• Thursday- Reserve Bank of India interest rate decision.

US: Job market rebounds in June

• Yields on US government bonds rose and the US dollar strengthened against other major currencies as the US economy beat forecasts to add 224,000 new jobs in June1;
• Meanwhile, trade optimism following the constructive meeting between President Trump and Xi Jinping at the G20 summit propelled US equities to a record high, although Trump threatened additional tariffs on European goods in response to EU subsidies for the aviation industry.

• Omnis view: The rebound by the US job market after May’s setback means expectations of a 0.5% (or greater) rate cut at the Federal Reserve’s next meeting at the end of July might need to be revised. Yield on two-year US government bonds for week commencing 1st July 2019
(source: ft.com)

Europe: Lagarde nominated as new ECB president

• Yields on European government bonds fell following the nomination of Christine Lagarde, currently head of the International Monetary Fund, as president of the European Central Bank (ECB);
• Elsewhere in Europe, Italy avoided EU disciplinary measures after the country’s coalition government pledged to reduce its budget deficit over the next two years.

• Omnis view: Lagarde is considered more flexible and accommodative on monetary policy than other candidates, which led to the bond rally. However, her appointment must be confirmed by the European Parliament.

UK: Carney warning about growth outlook

• Yields on UK government bonds fell as Bank of England (BoE) governor Mark Carney warned that uncertainties including Brexit and trade tensions could weigh on UK and global economic growth.
1 https://www.dol.gov/newsroom/releases/osec/osec20190705

• Omnis view: The odds of an interest rate cut by the BoE at some stage this year have increased after Carney’s comments.

LOOKING AHEAD - TALKING POINTS

Economic data

• Wednesday- Chinese inflation rate in June; UK monthly economic growth in May;
• Thursday- US inflation rate in June;
• Friday- Chinese imports, exports and balance of trade in June.

US: Dovish Federal Reserve boosts equities

• Federal Reserve chairman Jay Powell warned that economic uncertainty had increased recently in testimony to the US House of Representatives;
• Meanwhile, US inflation marginally beat expectations to increase by 0.1% in June compared to May and by 1.6% compared to a year earlier1.

• Omnis view: US equities hit a record high as Powell’s warning, which appeared to overlook the easing of trade tensions between the US and China and the recent improvement in domestic economic data, raised the prospect of a rate cut at the Fed’s next meeting at the end of July.

UK: Brexit rhetoric weighs on sterling

• Sterling weakened to its lowest level against the US dollar in two years as Brexit rhetoric from both candidates in the Conservative leadership contest weighed on sentiment;
• However, there was better news for the British economy which rebounded from April’s contraction to grow by 0.3% in May2.

• Omnis view: Sterling remains sensitive to Brexit developments. The uncertainty is likely to continue after the new Tory leader is announced on 22nd July, as the window for any possible renegotiation of the withdrawal deal is short due to the House of Commons’ summer recess which starts on 25th July.

LOOKING AHEAD

Economic data

• Monday- Chinese economic growth in the second quarter of 2019;
• Tuesday- UK unemployment in May;
• Wednesday- UK inflation rate in June;
• Friday- Japanese inflation rate in June.

Corporate earnings

• US banks including Citigroup, JPMorgan Chase, Goldman Sachs and Wells Fargo kick off second-quarter
earnings season.

1 https://www.bls.gov/news.release/cpi.nr0.htm
2 https://www.ons.gov.uk/economy/grossdomesticproductgdp/bulletins/gdpmonthlyestimateuk/may2019

UK: Political manoeuvring boosts sterling

• Sterling recovered from its lowest level against the US dollar in two years as MPs backed an amendment
which would make it harder for the next Prime Minister to suspend parliament ahead of the Article 50
deadline on 31st October;
• The amendment to a bill unrelated to Brexit requires ministers to update the House of Commons in October
on progress to restore the power-sharing executive in Northern Ireland.

• Omnis view: There were signs that the EU might be softening its stance on the contentious Irish border issue after the EU’s chief negotiator Michel Barnier claimed to be open to alternative solutions, although neither side seems to be able to come up with a concrete proposal.

Corporate Earnings: Stong Start to earnings season by US Banks

• US banks Citigroup, Goldman Sachs, Bank of America and JP Morgan all beat earnings forecasts in the
second quarter of the year;
• However, shares fell in Netflix, the first of the FAANG group of tech stocks to report, after the company
missed expectations for new subscribers and lost customers in the US.

• Omnis view: US banks typically set the tone for earnings season so last week’s results would usually be considered encouraging, although the outlook remains subdued.

Asia: Trade tariffs weigh on Chinese economy

• Economic growth in China slowed in the second quarter as trade tariffs imposed by the US on the country’s
goods appeared to take effect.

• Omnis view: The Chinese economy is growing at a robust rate nonetheless, and markets should welcome the prospect of further stimulus measures by Beijing.

LOOKING AHEAD - TALKING POINTS

Conservative leadership contest

• Theresa May’s successor as leader of the Tory party and Prime Minister is announced on Tuesday.

Monetary policy

• Thursday- European Central Bank interest rate decision.

Economic data

• Friday- initial estimate of US economic growth in the second quarter.

Corporate earnings

• Facebook, Amazon and Google’s parent Alphabet are the next of the FAANG stocks to report earnings, along with industry bellwether Caterpillar.

• US equities fell after the Federal Reserve lowered interest rates for the first time in 10 years by 0.25%, blaming global economic uncertainty and trade tensions1;
• Meanwhile, the US economy added 164,000 jobs in July, in line with forecasts, although June’s figure was revised down from 224,000 to 193,0002.

• Omnis view: The markets were disappointed that the Fed decided against reducing rates by a greater margin and by comments from chairman Jay Powell claiming this was an isolated adjustment rather than the start of a series of cuts.

UK: Sterling weakens despite Johnson’s reassurance

• Sterling hit its lowest point against the US dollar since Article 50 was triggered after Michael Gove, the minister responsible for planning the UK’s departure from the EU, suggested a ‘no deal’ Brexit was the government’s working assumption;
• There was further pressure on sterling as the Bank of England downgraded its forecast for UK economic growth, but it held the interest rate at 0.75%.

• Omnis view: The Prime Minister subsequently rebutted Mr Gove and insisted that he still believes the chances of a ‘no deal’ Brexit are remote, although the two sides do not seem to be moving any closer to a resolution on the contentious issue of the Irish border.

Trade: Trump ramps up tensions with China

• Global equities fell after US President Donald Trump tweeted he would impose tariffs of 10% on an additional
$300 billion worth of Chinese goods from the start of September, and China pledged to take
countermeasures.

• Omnis view: The optimism following the meeting between President Trump and his Chinese counterpart Xi Jinping at the G20 summit has faded, and a breakthrough appears to be unlikely any time soon.

LOOKING AHEAD - TALKING POINTS

Economic data

• Thursday- Chinese imports, exports and balance of trade in July;
• Friday- Chinese inflation rate in July; UK economic growth in the second quarter.

1 https://www.federalreserve.gov/newsevents/pressreleases/monetary20190731a.htm
2 https://www.bls.gov/news.release/empsit.nr0.htm

Global trade: Tensions intensify between US and China

• Global equities fell after US President Donald Trump labelled China a ‘currency manipulator’ for allowing the exchange rate between the two countries’ currencies to fall to 7 yuan to US$1, its lowest level in over 10 years;
• China allowed its currency, the yuan, to weaken in response to President Trump’s recent threat to impose trade tariffs- taxes on companies importing products from abroad- of 10% on US$300 billion worth of Chinese goods from the start of September;
• By devaluing its currency in this manner, Chinese goods become cheaper to foreign countries and offset the pact of tariffs, if only to a degree.
• There was further bad news for global equities on Friday when President Trump claimed he was not ready to agree a trade deal with China and he would not mind if talks scheduled for September were cancelled.

• Omnis view: There had been signs during the week that tensions might be easing- the Chinese central bank took steps to stabilise its currency- but President Trump’s comments at the end of the week suggest a resolution is far from imminent. His policies regarding trade tensions with China continue to be unpredictable.

UK: Brexit concerns weigh on sterling

• Sterling weakened against the US dollar as reports emerged that if Prime Minister Boris Johnson loses a vote of no confidence in his government, which MPs could call in an effort to prevent a ‘no deal’ Brexit, he would set a date for a general election shortly after the UK leaves the EU on 31st October;
• The timing of a general election would be crucial- by holding it after 31st October, Boris could avoid any more extensions to the Article 50 deadline;
• Sterling fell further against the US dollar as figures released on Friday showed the British economy shrank in the second quarter of 2019 (April to June) for the first time in seven years.

• Omnis view: MPs cannot take any action until parliament returns from its summer holidays on 3rd September (unless it is recalled early). Meanwhile, Boris insisted the two sides have ample opportunity to agree a deal ahead of the Article 50 deadline, although he stressed it was up to the EU to show flexibility about the Irish border.

EU: Doubts over future of Italian coalition

• Italian equities fell as Matteo Salvini, one of the country’s deputy Prime Ministers and leader of the League party, called for a vote of no confidence in the Prime Minister;
• Mr Salvini was hitting back after Five Star, the League’s coalition partner, voted against a proposal for a new high-speed rail link with France, which his party supported.

• Omnis view: While Mr Salvini claimed policy disagreements were behind his call for the vote of no confidence, he may also be trying to take advantage of a recent surge in support for his party.

LOOKING AHEAD - TALKING POINTS

Economic data

• Wednesday- UK inflation rate in July.
• Friday – US retail sales in July.

UK: Boris suspends Parliament

• Sterling fell against the US dollar as the Prime Minister Boris Johnson announced Parliament would be suspended for five weeks from the 10th September until 14th October;
• Known as proroguing, this type of suspension is common after a new government is formed, but the timing and the length is controversial on this occasion;
• Boris claimed he needs the time to set out his domestic agenda, while MPs who oppose a ‘no deal’ Brexit worry he is circumventing Parliament to ensure the UK leaves the EU on 31st October.

• Omnis view: The suspension of Parliament means MPs have a shorter window and fewer options to prevent what they fear could be a ‘no deal’ Brexit, although it may also put pressure on the EU to make concessions that would secure support for the existing withdrawal deal.

Trade: Tensions ease between US and China

• US shares rose on Monday after US President Donald Trump claimed China wanted to restart talks and agree a trade deal to bring an end to tensions between the two countries;
• Meanwhile, Chinese vice-premier Liu He said his government opposes any escalation of trade tensions.

• Omnis view: The markets welcomed the softening of rhetoric by both sides, but President Trump’s confrontational style of negotiation and his unpredictability suggest a resolution may still be some way off.

LOOKING AHEAD - TALKING POINTS

Economic data

• Wednesday- US imports, exports and balance of trade in July;
• Friday- US non-farm payrolls (job creation) and wage growth in August;
• Sunday- Chinese imports, exports and balance of trade in August;

UK: Brexit developments and rebounding economy boost sterling

• Sterling strengthened to its highest level in two months against the US dollar as the prospect of the UK leaving the EU without a deal appeared to fade;
• The Speaker of the House of Commons said he would allow MPs to do whatever is necessary to prevent a ‘no deal’ Brexit, while media reports suggested the Democratic Unionist Party (DUP) may permit regulatory checks on goods crossing the Irish sea to help the Prime Minister reach an agreement with the EU;
• Sterling had started the week strongly as the UK economy beat expectations to grow by 0.3% in July1.

• Omnis view: The Prime Minister held his first face-to-face meeting with European Commission President Jean-Claude Juncker today, with possible solutions to the issue of the Irish border- the main obstacle to a deal- high on the agenda.

Trade: Goodwill gestures ease tensions

• US shares rallied as US President Donald Trump postponed raising trade tariffs- taxes on companies importing products from abroad- on $250 billion of Chinese goods that were due to come into effect at the start of October;
• China also announced it would exempt a range of US products from tariffs;
• There was further good news for US shares at the end of the week when President Trump suggested the US would consider agreeing an interim trade deal with China to ease tensions.

• Omnis view: The latest developments bode well for the next round of trade talks which are scheduled to take place at the end of September, although President Trump has shown in the past that he can change his mind quickly.

EU: ECB takes steps to stimulate growth

• The European Central Bank (ECB) cut interest rates and relaunched quantitative easing- its bond buying programme which pumps money into the financial system- in an effort to revive economic growth in the region.

• Omnis view: There was a relatively muted response from European shares as the ECB’s actions were widely anticipated, although the decision to keep the latest round of QE open-ended came as a surprise.

Commodities: Oil prices rally after attack on Saudi facilities

• Oil prices experienced their biggest one-day jump in nearly 30 years after attacks on two of Saudi Arabia’s facilities cut the country’s production capacity by 50%.

• Omnis view: While Saudi Arabia and the US pledged to tap into their reserves to stabilise price, any disruption to production will make oil more expensive and weigh on the global economy in the near term.

LOOKING AHEAD - TALKING POINTS

Economic data

• Wednesday- UK inflation rate in August;
• Friday- Japanese inflation rate in August.

Monetary policy

• Wednesday- Federal Reserve (US central bank) interest rate decision;
• Thursday- Bank of Japan interest rate decision; Bank of England interest rate decision.

1 https://www.ons.gov.uk/economy/grossdomesticproductgdp/bulletins/gdpmonthlyestimateuk/july2019#gross-domestic-product-gdp-grew-by-03-in-july-2019

US: Federal Reserve cuts interest rates

• US shares rallied as the Federal Reserve- the US central bank- cut interest rates by 0.25% for the second time this year due to subdued domestic inflation (the rate at which prices increase) and concerns about the global economic outlook;
• US President Donald Trump criticised the board for not lowering rates by a wider margin.

• Omnis view: The Federal Reserve signalled that rates would not change again for the foreseeable future, which may lead to further clashes with President Trump as he believes lower rates will support the economy and strengthen his bid for re-election.

UK: Sterling sensitive to Brexit developments

• Sterling strengthened against the US dollar after European Commission president Jean-Claude Juncker indicated the UK and the EU could agree a withdrawal deal and the EU would be willing to consider alternatives to the Irish backstop;
• However, sterling handed back those gains as the Irish government rejected Boris Johnson’s suggestion that the finer details could be confirmed after the UK leaves the EU.

• Omnis view: The issue of the Irish border remains the biggest obstacle to a withdrawal deal. However, there are signs the two sides are making progress- the Brexit-supporting Democratic Unionist Party (DUP) also claimed it would consider bespoke solutions to avoid a hard border.

Commodities: Oil prices slide as Saudi Arabia restores production

• Oil prices fell as Saudi Arabia’s energy minister said production will be restored by the end of September following the attacks on its facilities and supplies should not be disrupted in the meantime.

• Omnis view: There were concerns that higher oil prices could weigh on the global economy, so the markets should welcome reassurance from Saudi officials.

LOOKING AHEAD - TALKING POINTS

Economic data

• Thursday- confirmation of US economic growth in the second quarter of 2019.

Brexit

• The UK supreme court should rule on whether the Prime Minister’s suspension of parliament- known as proroguing- is legal on Monday or Tuesday. If Boris loses, parliament will be recalled.

Thomas Cook

• The collapse of travel company Thomas Cook means the government will have to arrange for the return of 150,000 UK holidaymakers. The disruption may affect the rest of the sector and weigh on share prices.

UK: Supreme Court rules against Boris

• Sterling weakened against the US dollar despite the UK Supreme Court ruling that the suspension of Parliament for five weeks- known as proroguing- by the Prime Minister was unlawful.

• Omnis view: Political uncertainty remains elevated. The government is legally bound to request another extension to the Article 50 deadline if the two sides fail to agree a withdrawal deal by the EU summit on 17th October. However, Boris continues to insist the UK will leave the EU on 31st October. Unless the EU makes concessions that would secure the backing of MPs, it is hard to see how Boris can avoid requesting an extension.

US: Democrats launch impeachment inquiry

• US shares fell after the Democratic Party, which has a majority in the House of Representatives (the lower house of Congress), launched an inquiry into the conduct of US President Donald Trump which could lead to his removal from office- known as impeachment;
• President Trump has been accused of asking the Ukrainian government to investigate the son of Democratic presidential candidate Joe Biden, a potential rival in next year’s election.

• Omnis view: President Trump should survive as impeachment requires a majority of two thirds in the Senate (the upper house) where the Republican party holds control. However, the inquiry could distract him from other more pressing matters such as trade tensions with China (see below).

Trade: Uncertainty weighs on US shares

• US shares rose after President Trump told reporters that a trade deal with China “could happen sooner than you think”;
• US shares handed back some of those gains later in the week after media reports suggested the US is unlikely to extend a temporary permit allowing US companies to do business with Chinese tech firm Huawei and President Trump was considering banning Chinese companies from listing on US stock exchanges.

• Omnis view: The next round of trade talks start in October, but it remains to be seen whether the two sides can make any progress.

LOOKING AHEAD - TALKING POINTS

Economic data

• Monday- EU unemployment rate in August;
• Tuesday- Japanese unemployment rate in August;
• Friday- US job creation in September; US imports, exports and balance of trade in August.

Brexit: Prime Minister proposes alternative Irish border plan

• Sterling held steady against the US dollar as Prime Minister Boris Johnson submitted his plan to replace the Irish backstop in the Brexit withdrawal deal;
• The proposal involved Northern Ireland staying in the single market- which means it would be subject to EU regulations covering goods, agriculture and food- but leaving the customs union so it could benefit from any trade deals signed by the UK.

• Omnis view: The EU rejected the proposal and gave the UK until today to make concessions. Meanwhile, Boris insisted that the UK will leave the EU on 31st October, despite Scottish Supreme Court documents suggesting he will request an extension if the two sides cannot come to an agreement by 19th October.

US: Mixed week for shares

• US shares fell after the release of economic data indicated that activity in the US industrial sector slowed in September;
• However, they recovered at the end of the week after the latest non-farm payroll report showed the US economy created 136,000 new jobs in September, while unemployment dropped to its lowest rate in 50 years1.

• Omnis view: The jobs report did not meet expectations, but the markets welcomed the figure because it signalled the US economy is not running too hot or too cold. Some investors believe the Federal Reserve (the US central bank) will leave interest rates unchanged until economic data improves.

Europe: US announces tariffs

• The US announced it would impose tariffs- taxes on companies importing goods from abroad- of 25% on US$7.5 billion of EU products including cheese, olives, wine, single-malt whiskeys and civil aircraft;

• Omnis view: The World Trade Organisation (WTO) allowed the US to impose these tariffs in retaliation for government aid from certain EU countries to Boeing’s rival Airbus. This is the largest award in WTO history, and US officials said the tariffs should be in place by mid-October.

UK: Concern about the economy weighs on shares

• UK shares fell after data revealed the services, manufacturing and construction sectors had slowed in September.

• Omnis view: Brexit uncertainty will continue to stifle the economy until there is greater clarity about the terms of the UK’s departure from the EU. Recent economic weakness has raised the prospect of an interest rate cut by the Bank of England before the end of the year to 38.1% according to Bloomberg.

LOOKING AHEAD - TALKING POINTS

Economic data

• Thursday- US inflation rate in September; UK economic growth in August.

Central banks

• Wednesday – The Federal Reserve publishes minutes from the latest meeting of its interest rate setting committee.

Trade

• The next round of trade talks between the US and China start on Thursday;
• Chinese President Xi Jinping and Indian Prime Minister Narendra Modi meet at an unofficial summit in Chennai on Friday.

1 https://www.bls.gov/news.release/empsit.nr0.htm

Brexit: Possible breakthrough on Irish border

• UK shares rallied and sterling strengthened against the US dollar as the prospects of a last-minute Brexit deal improved;
• The Prime Minister and his Irish counterpart said they could see ‘a pathway to a deal’ after meeting on Thursday, and the EU agreed to hold intensive talks with the UK over the weekend;
• Meanwhile, the UK economy grew by 0.3% in the three months to August, up from 0.1% in the three months to July1.

• Omnis view: The chances of the two sides agreeing a deal seem to have improved following the UK’s concessions over the contentious issue of the Irish border. However, it remains to be seen if Parliament will back whatever deal Boris reaches with the EU.

Trade: Latest US- China talks lead to limited deal

• Global shares rallied after US President Donald Trump and Chinese vice-premier Liu He agreed a limited trade deal;
• The US put a hold on tariffs- taxes on companies importing products from abroad- on US$250 billion of Chinese goods due to come into effect next week, and China promised to increase purchases of US agricultural products.

• Omnis view: While the markets welcomed some respite from trade tensions, this deal falls short of what President Trump pledged on the campaign trail, so there may be more uncertainty ahead.

Europe: Mixed week for German industrial data

• Economic data showing slowing activity in Germany’s industrial sector in August and September weighed on the country’s shares, but they moved higher after industrial production unexpectedly rose in August.

• Omnis view: The export-heavy German economy is considered the engine of the EU so a slowdown is bad news for the region as a whole.

Emerging markets: Turkish forces enter Northern Syria

• The Turkish lira fell against the US dollar after Turkey’s armed forces launched an operation in Northern Syria to establish what the country’s president called a ‘safe zone’.

• Omnis view: Turkey’s actions, which have been widely criticised, are contained at present and should not affect other emerging markets.

LOOKING AHEAD - TALKING POINTS

Economic data (NB all regions)

• Tuesday- UK unemployment rate in August;
• Wednesday- UK inflation rate in September; EU inflation rate in September;
• Friday- Japanese inflation rate in September, Chinese economic growth in the third quarter of 2019.

1 https://www.ons.gov.uk/economy/grossdomesticproductgdp/bulletins/gdpmonthlyestimateuk/august2019

Brexit: UK and EU agree withdrawal deal

• The pound hit its highest point in five months against the US dollar as the UK and EU agreed a Brexit withdrawal deal, although it handed back some of those gains when the Democratic Unionist Party (DUP) said it would oppose the deal;
• The government cancelled a meaningful vote planned for Saturday after MPs backed an amendment designed to avoid an accidental ‘no deal’ Brexit;
• The Prime Minister consequently had to request a delay to the Article 50 deadline, but he did not sign the letter and wrote another one saying he was not in favour of an extension.

• Omnis view: The fading prospects of a ‘no deal’ Brexit boosted the FTSE 250 index of mid-sized companies which are particularly exposed to the UK economy. Boris will try to hold a vote on the withdrawal deal early this week but whether or not he can secure a majority remains to be seen. Opposition MPs pledged to seek a referendum to let the UK public make the ultimate decision.

Trade: Doubts emerge about latest truce

• US shares paused as White House officials warned that tariffs- taxes on companies importing goods from abroad- on US$150 billion of Chinese products planned for December would come into force if China did not commit to the limited trade deal agreed the week before;
• Meanwhile, the International Monetary Fund (IMF)- a global institution which promotes financial cooperation- blamed trade tensions between the US and China for lowering its forecast for worldwide economic growth in 2019.

• Omnis view: The fragile nature of the trade truce suggests there may be further uncertainty before a potential meeting between US President Donald Trump and his Chinese counterpart Xi Jinping at the APEC (Asia-Pacific Economic Cooperation) Summit in November.

US: Hesitant consumers raise prospect of interest rate cut

• Spending by US shoppers experienced its biggest decline in seven months in September, according to data released by the US Department of Commerce.

• Omnis view: A slowdown in consumer spending increases the chances that the Federal Reserve (the US central bank) will cut interest rates at its next meeting at the end of October.

Asia Pacific: Trade tensions weigh on Chinese economy

• Chinese shares sank as figures showed the country’s economy grew by 6% in the third quarter of 2019, its slowest pace in nearly thirty years1;
• There was further bad news for the Chinese economy as exports- goods produced in China and sold abroad- fell in September to the lowest level since February.

• Omnis view: Trade tensions with the US are weighing on the Chinese economy, which increases the pressure on Beijing to find a resolution.

Japan: Trade deal signed with US

• Japanese shares rose as the country agreed a limited trade deal with the US, which cut tariffs on US agricultural and Japanese manufacturing goods and delayed tariffs on Japanese cars.

• Omnis view: Japanese markets welcomed the trade deal due to the significant impact it should have on the country’s economic growth.

Companies: US banks get earnings season off to strong start

• Several American banks reported corporate earnings (company profits) for the third quarter of 2019- JP Morgan, Bank
of America, Citibank and Morgan Stanley beat expectations, but Goldman Sachs fell short;
• Shares in Netflix rallied after the streaming service beat earnings expectations in the third quarter, although US
subscriptions fell below estimates.

• Omnis view: Earnings are one of the main drivers of the stock markets, and US banks set the tone for earnings
season, so these results are encouraging. However, overall earnings among US-listed companies are expected to
decline by 4.6% according to research firm FactSet2.

LOOKING AHEAD - TALKING POINTS

Monetary policy

• Thursday- European Central Bank interest rate decision.

Corporate earnings

• Amazon, UK banks Royal Bank of Scotland and Barclays and Caterpillar- a bellwether for the global economy because it is one of the leading producers of equipment for the construction industry- are among the companies reporting corporate earnings this week.

1 http://www.stats.gov.cn/english/PressRelease/201910/t20191021_1704329.html

Brexit: Parliament backs withdrawal deal but rejects Boris’ timetable

• UK shares rallied and sterling strengthened against the US dollar after the House of Commons backed the Prime Minister’s Brexit withdrawal deal;
• However, sterling handed back some of those gains after MPs voted against Boris’ plan to rush the legislation through Parliament so the UK could leave the EU on 31st October;
• Boris then said he would give MPs until 6th November to approve the deal if they agreed to hold a general election on 12th December.

• Omnis view: A general election before Christmas is looking increasingly likely, as the Scottish National Party and Liberal Democrats proposed an alternative date of 9th December which would simply require a parliamentary majority rather than the support of two-thirds of MPs.

Trade: US and China move towards initial deal

• US shares rose as US officials said they were getting close to agreeing the first phase of a trade deal with China ahead of a potential meeting between US President Donald Trump and his Chinese counterpart Xi Jinping at the Asia-Pacific Economic Cooperation (APEC) summit in mid-November.

• Omnis view: The trade truce between the US and China appears to be holding for now, although some of the most contentious issues still need to be addressed.

Europe: Shares climb despite mixed economic data

• European shares hit their highest point this year despite economic data depicting a mixed view of the region’s economy;
• The Purchasing Managers Index- a measure of business activity- rose in the EU and France in October, but it showed activity continued to slow in Germany;
• Meanwhile, the European Central Bank kept interest rates unchanged at its last meeting before Christine Lagarde takes over as President from Mario Draghi.

• Omnis view: A combination of encouraging corporate earnings, easing of trade tensions between the US and China and the fading prospects of a ‘no deal’ Brexit appear to be helping European markets overcome the region’s faltering economy.

Corporate earnings: Tech firms boost US shares

• There was a further boost for US equities as software developer Microsoft, chipmaker Intel, payments processor Paypal and auto manufacturer Tesla beat earnings forecasts in the third quarter;
• However, online retailer Amazon and industrial bellwether Caterpillar fell short of expectations.

• Omnis view: Earnings season is going better than expected- according to research firm FactSet, 40% of US companies have reported as of Friday 25th October, and 80% have beaten estimates. The decline in earnings is now forecast to be 3.7%, rather than 4.8%1.

LOOKING AHEAD - TALKING POINTS

Economic data

• Wednesday- US economic growth in the third quarter of 2019;
• Thursday- EU economic growth in the third quarter of 2019, unemployment rate in September and inflation rate in October;
• Friday- Japanese unemployment rate in September; US non-farm payrolls (job creation) in October

Monetary policy

• Wednesday- Federal Reserve (US central bank) interest rate decision.

Corporate earnings

• US tech firms Apple, Alphabet (parent company of Google) and Facebook and UK bank Lloyds are among the companies reporting annual results this week.

1 https://insight.factset.com/sp-500-earnings-season-update-october-25-2019

UK: General election set for 12th December

• Sterling strengthened against the US dollar as MPs overwhelmingly voted to hold a general election on 12th December once they were satisfied that the risk of a ‘no deal’ Brexit had been averted;
• At the start of the week, the government accepted the EU’s offer of an extension to the Article 50 deadline until 31st January.

• Omnis view: The Conservative party has a sizeable lead in the opinion polls ahead of the election which would give the Prime Minister the parliamentary majority he needs to deliver his version of Brexit. However, Boris’ predecessor went into the election in 2017 in a similar position and ended up losing seats, and opposition parties will campaign on a second referendum, so the result is far from certain.

US: Shares rally as Federal Reserve cuts interest rates

• US shares hit a record high as the Federal Reserve (the US central bank) lowered interest rates by 0.25% for the third time in 2019;
• There was further good news for the US market as the country’s economic growth in the third quarter of the year and job creation in October both beat forecasts.

• Omnis view: US shares welcomed the Federal Reserve’s decision, but they may need to start looking elsewhere for catalysts, especially if the domestic economy remains strong, as the Fed signalled rates would remain unchanged for the foreseeable future.

China: Manufacturing activity picks up in October

• Chinese shares rose after activity in the country’s manufacturing sector grew at the fastest rate since February 2017 in October, boosted by an increase in exports (goods produced domestically but sold abroad).

• Omnis view: The Chinese manufacturing sector seemed to benefit from US concessions which exempted 400 products from tariffs (taxes on goods imported from abroad). Meanwhile, the two sides may have to wait to sign the first phase of a trade deal because protests forced Chile to cancel the Asia-Pacific Economic Cooperation (APEC) summit where US President Donald Trump and his Chinese counterpart Xi Jinping were due to meet.

Japan: Central bank continues battle to create inflation

• The Bank of Japan (BoJ) left interest rates unchanged at its latest meeting but hinted it would be prepared to cut rates further to boost inflation (the rate at which prices of goods and services rise).

• Omnis view: The BoJ is keeping interest rates low in an effort to raise prices, as a certain degree of inflation, which has remained subdued in Japan over the last few years, is healthy for the economy.

Corporate earnings: Tech shares lead the way

• As earnings season continued, iPhone maker Apple and social media platform Facebook beat forecasts in the third quarter, but Alphabet (parent company of Google) fell short of expectations.

• Omnis view: In its latest update, research firm FactSet revealed that just over 70% of US companies had reported results as of 1st November and 76% beat forecasts. The decline in earnings improved again, from 3.8% the previous week to 2.7% last week1.

LOOKING AHEAD - TALKING POINTS

Economic data

• Tuesday- US imports, exports and balance of trade in September;
• Friday- Chinese imports, exports and balance of trade in October;
• Saturday- Chinese inflation rate in October.

Monetary policy

• Thursday- Bank of England interest rate decision.

US: Trade optimism and strong earnings boost shares

• Optimism about progress in trade tensions (see below) and better-than-expected corporate earnings helped US shares hit another record high;
• Meanwhile, figures released last week showed the country’s trade deficit- the difference between the volume of goods it imports and exports- shrunk and growth in the services sector beat forecasts in October, but productivity fell in the third quarter.

• Omnis view: A trade resolution would boost sentiment, and although corporate earnings exceeded expectations, markets would welcome a return to growth in 2020.

UK: Bank of England downgrades economic outlook

• The pound weakened against the US dollar after the Bank of England (BoE) left interest rates unchanged and downgraded its forecast for the UK economy due to Brexit and the global slowdown.

• Omnis view: The likelihood of the BoE following the lead of other central banks seems to have increased as two members of the committee which is responsible for setting interest rates voted in favour of a 0.25% cut1.

Global trade: US and China to reduce tariffs

• Global shares rallied after Chinese officials announced they had agreed with the US to gradually remove tariffs-taxes on goods imported from abroad- imposed during the ongoing trade tensions between the two countries.

• Omnis view: The Chinese had been insisting that the US remove all tariffs before they would agree a deal, so this latest development bodes well for future talks. However, US President Donald Trump denied that he had committed to any concessions.

Japan: US trade deal boosts car industry

• Japanese shares rose after the country’s foreign minister claimed the partial trade deal recently agreed with the US could eliminate tariffs on the domestic automobile industry.

• Omnis view: The markets welcomed the minister’s comments because US tariffs on Japanese cars would weigh heavily on some of the country’s biggest companies.

China: Exports fall again

• China’s currency, the renminbi, weakened against the US dollar at the end of the week after figures showed exports- goods produced domestically but sold abroad- fell for the third month in a row in October.

• Omnis view: A slowdown in exports shows that trade tensions with the US continue to hinder the Chinese economy, although October’s figure beat forecasts.

LOOKING AHEAD - TALKING POINTS

Economic data

• Monday- UK economic growth in the third quarter;
• Tuesday- UK unemployment rate in September;
• Wednesday- UK inflation rate in October; US inflation rate in October;
• Thursday- Japanese economic growth in the third quarter; EU economic growth in the third quarter;
• Friday- EU inflation rate in October.

1 https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2019/november-2019

UK: Brexit Party’s U-turn boosts Tory election chances

• The pound strengthened against the US dollar after the Brexit party announced it would not stand candidates in seats held by Conservative MPs;
• There was mixed news for the UK economy- growth slowed but unemployment dropped slightly in the third quarter of the year, while inflation- the rate at which prices rise- fell in October.

• Omnis view: The Brexit party’s U-turn increases the chances of the Conservatives winning a majority in Parliament which would allow Boris Johnson to secure his withdrawal deal. However, the polls were misleading in the last election, so the government cannot afford to take the result for granted. Meanwhile, lower inflation gives the Bank of England greater scope to consider cutting interest rates at its next meeting in December.

US: Trump warns China about higher tariffs

• US shares hit record highs amid optimism about a trade deal with China, despite US President Donald Trump warning he would raise tariffs- taxes on products imported from abroad- on Chinese goods if the two sides could not agree the first phase of a deal;
• In other news, Jay Powell, chairman of the Federal Reserve (the US central bank), said he does not expect to lower interest rates in December as long as the economic outlook does not change.

• Omnis view: The US and China hoped to have signed the initial trade deal by now, but the deadline has been put back due to protracted negotiations and the cancellation of the Asia-Pacific Economic Cooperation (APEC) summit where President Trump planned to meet his Chinese counterpart Xi Jinping. However, US trade officials sounded optimistic later in the week, so a breakthrough remains possible before the end of the year.

Europe: US to defer car tariffs?

• European shares rallied at the start of the week after EU officials said that President Trump would delay trade tariffs on the region’s automobile industry for six months;
• President Trump was due to confirm his decision on Thursday, but on Wednesday he claimed he would make an announcement soon, without setting any deadline;
• Germany narrowly missed going into what is technically considered a recession- two consecutive quarters of negative growth- after the country’s economy grew by 0.1% in the third quarter.1

• Omnis view: Markets welcomed the prospect of a delay to tariffs as they would weigh heavily on the EU economy, especially export-heavy countries like Germany.

Japan: Economic growth slows

• Japanese economic growth slowed in the third quarter, partly due to a fall in trade of goods and services with China;
• On a brighter note, the increase in a sales tax- similar to Value Added Tax (VAT) in the UK- which came into effect in October does not appear to have hampered consumer demand as it remained strong over the same period.

• Omnis view: The Japanese government recently announced it intends to launch of a range of measures to boost the country’s economy, including increased spending to upgrade infrastructure and encourage industrial activity, which should support the country’s stock market.

LOOKING AHEAD - TALKING POINTS

Economic data

• Friday- Japanese inflation rate in October.

UK general election

• Two televised debates take place this week, the first on Tuesday between the Prime Minister and Labour leader Jeremy Corbyn and the second on Friday also featuring Jo Swinson of the Liberal Democrats and Nicola Sturgeon of the Scottish National Party.

1 https://www.destatis.de/EN/Themes/Economy/National-Accounts-Domestic-Product/Tables/domestic-product--q-gdp.html;jsessionid=56FC16B5CDDD4FDE4207C3AE2CFCB548.internet712

UK: Election polling sways the pound

• The pound weakened against the US dollar early in the week after a poll by research firm Kantar showed the Conservatives’ lead in the general election shrinking;

• However, it recovered when further polls, including one from YouGov which successfully forecast the outcome of the 2017 election, indicated the Conservatives would win a majority.

• Omnis view: A Conservative majority would ease Brexit uncertainty in the short term as Boris Johnson should then have enough support for his withdrawal deal. However, with less than two weeks left to campaign, and the electorate’s views on Brexit testing traditional party affiliations, neither the Tories nor Labour will take anything for granted. Unless the markets experience a shock, the pound is likely to continue marking time until the election outcome becomes clear.

Trade: Optimism builds about phase one deal

• Global shares rose at the start of the week as US President Donald Trump claimed the US and China were in the ‘final throes’ of agreeing the first phase of a trade deal, while Chinese media reported the two sides were making progress towards resolving some of the most contentious issues.

• Omnis view: The positive rhetoric augured well for a deal, but President Trump risked undoing the recent progress by signing the Hong Kong Human Rights and Democracy Act (see below). Meanwhile, the clock is ticking towards the deadline of the 15th December for the next round of trade tariffs- taxes on products imported from abroad- on Chinese goods. In short, the atmosphere around global trade remains tense.

Asia: Human rights act tests US- China relations

• Global shares handed back some of the gains from earlier in the week after President Trump signed the Hong Kong Human Rights and Democracy Act which allows the US to impose sanctions on individuals accused of human rights abuses in Hong Kong.

• Omnis view: China threatened to retaliate if President Trump signed the human rights act which it sees as interfering in internal affairs, so it remains to be seen how this development could impact trade talks between the two sides.

US: Economic growth revised up in third quarter

• There was good news for the US economy as the Bureau of Economic Analysis upgraded growth in the third quarter to 2.1%, faster than the 1.9% it originally announced and a slight improvement on the previous quarter1 

• Omnis view: The upward revision of economic growth should reassure the markets about the health of the US economy.

Economic data

• Thursday- US imports, exports and balance of trade in October;

• Friday- US non-farm payrolls (jobs created) in November;

• Sunday- Chinese imports, exports and balance of trade in November.

UK general election

• The Prime Minister and Jeremy Corbyn, leader of the Labour party, meet in a televised debate on BBC1 on Friday.

Trade: US and China still negotiating as Trump turns attention elsewhere

Global shares fell when US President Donald Trump claimed he was willing to postpone a trade deal with China until after the US presidential election in November 2020;
However, the markets recovered as media reports suggested the US and China are getting closer to agreeing on reduced tariffs- taxes on goods imported from abroad- for the first phase of a deal;
Elsewhere, President Trump announced he would reintroduce tariffs on steel imported from Argentina and Brazil who he accused of allowing their currencies to weaken to the detriment of US farmers;
President Trump also threatened to impose tariffs on a range of European products in response to EU support for aviation firm Airbus and a French digital tax which could affect US companies such as Amazon and Facebook.

Omnis view: While trade tensions between major powers rattle the world economy, US threats to tariff other countries also intensifies uncertainty. Meanwhile, the US and China inch towards an initial trade deal. The next round of tariffs on Chinese goods come into effect on 15th December, but even if an agreement is not forthcoming, President Trump may delay them because of the impact on the US shoppers before the holiday season.

UK: Chances of Tory majority lifts pound

Sterling strengthened against the US dollar as the Conservative party maintained its lead in the polls ahead of the general election on Thursday.

Omnis view: The pound’s response suggests the markets would prefer the Conservatives to win a majority as Brexit uncertainty would ease in the short term if Boris Johnson could secure backing for his withdrawal deal. However, neither side can afford to take the result for granted as the last few days of campaigning get underway.

US: Jobs market boosts shares

US shares rallied after the non-farm payrolls report showed the US economy comfortably beat expectations by creating 266,000 new jobs in November.

Omnis view: Following last week’s upward revision of growth in the third quarter, the latest jobs number provides further evidence of the resilience of the US economy. However, the recent upbeat economic data is unlikely to change the Federal Reserve’s (US central bank) mind about keeping interest rates unchanged for the time being at its meeting on Wednesday.

Asia: Chinese manufacturing picks up despite trade tensions

There was good news for Asian shares as data showed that activity in China’s manufacturing sector expanded in November.

Omnis view: Signs of recovery in Chinese industrial activity hints at underlying strength in the domestic economy despite ongoing trade tensions with the US.

Japan: Government launches measures to boost growth

The Japanese government announced a number of policies designed to support the country’s economy including repairs after the recent typhoon, improvements to infrastructure and investment in research and development.

Omnis view: The Japanese markets will welcome these measures which are more powerful than expected and should stimulate the domestic economy.

LOOKING AHEAD - TALKING POINTS

Economic data

Tuesday- Chinese inflation rate in November; UK economic growth in October;
Wednesday- US inflation rate in November.

Monetary policy

Wednesday- Federal Reserve interest rate decision;
Thursday- European Central Bank interest rate decision.

UK general election

UK voters go to the polls on Thursday, and the result should be announced early on Friday morning.

Trade: Initial deal between US and China remains elusive

• Global shares have stopped rising as markets await firm news on trade developments between the US and China;

• The signals were mixed, as optimism amongst negotiators was countered by the risk that the US had aggravated China by passing the Hong Kong Human Rights and Democracy Act which allows it to impose sanctions on anyone believed to be repressing human rights;
• Time is running short, but the market still expects a positive announcement this year.

• Omnis view: How close the two sides are to signing the initial deal is unclear- at the end of the week both US President Donald Trump and his counterpart Xi Jinping sounded hopeful, but then President Trump confused matters by claiming China wanted a deal more than the US.

UK: Slowing economic activity weighs on pound

• The pound weakened against the US dollar as activity in the manufacturing and services sectors looks set to fall to its lowest level in three years in November according to a preliminary release of an economic indicator known as the Purchasing Managers Index1.

• Omnis view: The UK economy was already struggling with Brexit, but it also faces the uncertainty of a general election in the short term. Whether this uncertainty diminishes after the vote depends on the result.

US: Federal Reserve minutes released

• In the minutes from its latest meeting, the Federal Reserve (the US central bank) said political risks- including trade tensions with China and the chance of a ‘no deal’ Brexit- appear to have eased, but it expressed concern about the level of borrowing by US companies.

• Omnis view: The markets pay close attention to the minutes for any hint of a change in interest rates, although on this occasion the Federal Reserve reaffirmed earlier guidance that rates would stay the same unless the economic outlook changed.

China: Central bank cuts interest rates

• Chinese shares fell despite the decision by the People’s Bank of China (or the PBOC, the country’s central bank) to cut interest rates in an effort to boost the domestic economy.

• Omnis view: The markets were disappointed because the PBOC did not go far enough to support the Chinese economy which is struggling due to trade tensions with the US.

LOOKING AHEAD - TALKING POINTS

Economic data (NB all regions)

• Friday- Japanese unemployment rate in October; EU unemployment rate in October.

UK: Tory election success paves way for Brexit progress

• UK assets rallied as the Conservative party won a comprehensive victory in the general election, ending up with a parliamentary majority of 80 seats;
• The pound strengthened against the US dollar and the euro, while the FTSE 250 index of domestically focused companies outperformed the FTSE 100 which is mostly made up of international earners.

• Omnis view: Focus now turns to how the Prime Minister will use his majority. The priority should be securing his Brexit withdrawal deal so the UK can leave the EU by the latest Article 50 deadline of 31^st January. Uncertainty should ease in the short term If Mr Johnson succeeds, but the UK and the EU will then have to start negotiating a free trade deal which he has pledged to conclude by the end of 2020.

Trade: US and China seal initial deal

• Global markets rallied after the US and China agreed the first phase of a trade deal just ahead of the deadline for the next round of US tariffs- taxes on products imported from abroad- on Chinese goods;
• The US cancelled tariffs due to take effect on Sunday and cut tariffs imposed in September, while China committed to buying at least $40 billion of US agricultural products each year, strengthening protection of US intellectual property (patents, trademarks and copyrights) and to stop forcing US companies to share technology with local rivals.

• Omnis view: The initial trade deal is a welcome breakthrough and may reduce uncertainty for the time being. However, whether it leads to a conclusive agreement remains to be seen, as US officials have already expressed scepticism about the likelihood of China sticking to its pledges.

 US: Fed leaves rates unchanged

• US stocks rose as the Federal Reserve- the US central bank- decided against adjusting interest rates at its latest meeting and suggested that it does not foresee any changes in 2020.

• Omnis view: Fears of a recession have eased since the summer, while inflation- the rate at which prices rise- remains benign. This environment should allow the Federal Reserve to keep rates low for the foreseeable future, a favourable outlook for shares and, potentially, for those hoping for a weaker US dollar.

 Europe: New president sticks with record low rates

• The European Central Bank (ECB) kept interest rates unchanged following its first meeting under new president Christine Lagarde.
• Omnis view: Ms Lagarde indicated rates would remain the same for most of 2020 and said risks to the EU economy seemed to be easing, although the ECB lowered its growth forecast for the next three years.

 Japan: Economic growth revised up

• The Japanese economy grew at a faster rate in the third quarter than initially reported as stronger business investment boosted the figure from 0.2% to 1.8%.

• Omnis view: The Japanese economy remains sluggish nonetheless, and the improvement in the third quarter could have been a result of buyers bringing forward purchases ahead of a rise in the country’s sales tax on 1^st October.

 LOOKING AHEAD - Talking Points

 Economic data

• Tuesday- UK unemployment rate in October;
• Wednesday- UK inflation rate in November; EU inflation rate in November;
• Friday- Japanese inflation rate in November.

Monetary policy

• Thursday- Bank of Japan interest rate decision; Bank of England interest rate decision.

UK: Parliament backs Brexit withdrawal bill, but uncertainty returns

• The Prime Minister secured a comfortable parliamentary majority for his Brexit withdrawal bill which means the UK will leave the EU on 31^st January 2020;
• The pound weakened against the US dollar as the legislation prevents Mr Johnson from extending the transition period, so a ‘no deal’ Brexit remains a possibility if the UK and EU fail to negotiate a free trade deal before 31^st December 2020;
• There was further bad news for the pound when the Bank of England left interest rates unchanged and withheld judgement on how the latest Brexit developments might affect the economic outlook.
• Omnis view: The Prime Minister is following through on his campaign pledge to ‘get Brexit done’ by passing the withdrawal bill, although he has left a relatively tight window to negotiate a free trade deal. Whether he is prepared to leave without a deal at the end of 2020, or he believes the deadline will give him leverage during negotiations, remains to be seen.

US: Economic and trade optimism boost shares

• US shares hit new record highs thanks to optimism about trade relations with China and the domestic economy;
• President Trump tweeted that the US and China were getting close to signing the first phase of a trade deal, while economic growth was revised up in the third quarter and consumer spending increased in November compared with October.
• Omnis view: Despite the charges brought against President Trump for alleged abuse of power- known as impeachment- US shares appear to be on course for their strongest annual performance since 2013. While the impeachment headlines grab a lot of attention in the mainstream media, it looks highly unlikely that the Republican controlled Senate will vote in favour of the motion.

Trade: Trump to target Europe next?

• US official Robert Lighthizer said President Trump is ready to turn his attention to what he called a ‘very unbalanced’ trade relationship with Europe now that the initial deal has been agreed with China.
• Omnis view: Lighthizer suggested President Trump could resort to using tariffs- taxes on goods imported from abroad- to address the trade imbalance, which may lead to a new spell of global economic uncertainty. The EU has also recently been discussing trade relations with China.

Europe: Manufacturing activity falls again

• There was bad news for the EU economy as activity in the region’s manufacturing sector fell for the eleventh month in a row.
• Omnis view: The easing of trade tensions between the US and China should buoy export heavy European economies like Germany, although the prospect of US tariffs on the EU could offset this effect.

LOOKING AHEAD - TALKING POINTS

Economic data

• Friday- Japanese unemployment rate in November. 

Middle East: US airstrike kills Iranian general

• Global shares fell after the US military assassinated Qasem Soleimani, one of Iran’s top generals, who President Trump accused of targeting US interests in the Middle East;
• Government bonds rallied as investors switched their money into what are traditionally considered safe-haven assets (a government is less likely to default), while oil prices also rose due to the threat of disruption to supplies.
• Omnis view: Once again, President Trump’s unpredictability has raised political uncertainty. The reaction from the markets was relatively muted, but the demise of such an influential figure should lead to greater instability in the region, and the longer-term repercussions remain to be seen.

Trade: Trump sets date to sign initial deal

• Global shares had risen earlier in the week after President Trump announced that he would meet with senior Chinese officials at the White House on 15^th January sign the first phase of a trade deal;
• President Trump also said he would travel to China for talks on the second phase of the deal, although he did not commit to a date.
• Omnis view: While this initial deal represents progress and allows President Trump and his Chinese counterpart Xi Jinping to claim credit at home, some of the most contentious issues still need to be resolved.

China: Central bank seeks to stimulate economy

• There had been further good news for global equities on Wednesday when the People’s Bank of China (PBoC)- the Chinese central bank- reduced the amount of money the country’s banks need to keep in reserve in an effort to boost economic growth.
• Omnis view: The markets welcomed the PBoC’s decision because it frees up money which banks can use for commercial lending. These funds should help Chinese firms grow and have a positive knock-on effect on the country’s economy.

US: Manufacturing sector slows

• Activity in the US manufacturing sector fell to its lowest level since 2009 in December, according to the Institute for Supply Management¹.
• Omnis view: Trade tensions between the US and China have weighed on the US manufacturing sector, but activity may pick up after the conclusion of the initial deal discussed above.

¹ Institute for Supply Management

LOOKING AHEAD - TALKING POINTS

Economic data

• Tuesday- US imports, exports and balance of trade in November;
• Thursday- Chinese inflation rate in December; EU unemployment rate in November;
• Friday- US non-farm payrolls (job creation) in December.

LAST WEEK – KEY Takeaways

Middle East: Shares rise as Iran backs off

• Global shares rose as tensions eased between the US and Iran after the US assassinated a top Iranian general on Friday 3rd January;
• US President Donald Trump claimed Iran appeared to be ‘standing down’ after launching limited missile attacks on US military bases in Iraq;
• Omnis view: The threat of escalation seems to have diminished as Iran deals with anti-regime protests following the downing of a Ukrainian passenger jet by the Revolutionary Guards. We would not rule out further confrontation between the US and Iran in the coming months, but for now they seem to have drawn a line under events with the offer of talks.

US: Labour market falls short in December

• US shares handed back some of the gains from earlier in the week after the non-farm payroll report showed the country’s economy created fewer new jobs than expected in December.
• Omnis view: Wage growth also slowed, but unemployment remains at historic lows, so the Federal Reserve- the US central bank- is unlikely to change its mind about leaving interest rates unchanged in 2020 for the time being.

UK: Bank of England governor suggests economy may need support

• Sterling weakened against the US dollar as the governor of the Bank of England (BoE) suggested it may have to take action to support the short-term recovery of the UK economy.
• Omnis view: Whether the BoE lowers interest rates depends on how quickly consumer confidence returns, which will be influenced by progress made by the UK and the EU on a free trade deal.

Europe: Strong end to 2019 for economy

• There was good news for the EU economy in December as business activity increased and consumer spending in the run- up to Christmas boosted inflation (the rate at which prices rise).
• Omnis view: The European Central Bank will welcome signs that the region’s economy is strengthening as it eases pressure to lower interest rates, which are already negative, any further.

LOOKING AHEAD - TALKING POINTS

Economic data (NB all regions)

• Monday- UK economic growth in November;
• Tuesday- Chinese imports, exports and balance of trade in December; US inflation rate in December;
• Wednesday- UK inflation rate in December;
• Friday- Chinese economic growth in the fourth quarter; EU inflation rate in December.

Trade

• President Trump is due to meet senior Chinese officials at the White House on Wednesday to sign the first phase of a trade deal.

Corporate earnings

• US banks JP Morgan, Morgan Stanley and Wells Fargo are among the first companies to report profits for the fourth quarter of 2019 this week.

Omnis Investments is now tweeting daily updates. Follow us at: @OmnisInvest

This update reflects Omnis’ view at the time of writing and is subject to change.

The document is for informational purposes only and is not investment advice. We recommend you discuss any investment decisions with your Openwork financial adviser. Omnis is unable to provide investment advice. Every effort is made to ensure the accuracy of the information but no assurance or warranties are given.

What does 2020 hold in store for investors?

Starting at home, Brexit uncertainty should persist despite the substantial majority won by Boris Johnson at the general election. The UK will leave the EU on 31st January and enter a transition period until 31st December. The Prime Minister insists he can conclude a free trade deal in this relatively short window, but if he fails to agree terms with the EU the UK could still face a hard Brexit at the end of the year. Mr Johnson has also hinted that his preferred deal would protect the trade in goods rather than services which account for a significant share of UK economic growth. We believe the pound’s performance is the best indicator of what kind of outcome the markets expect- if the pound rises, a softer Brexit is thought more likely, but a fall would imply a harder Brexit.

Nonetheless, we favour UK shares. Brexit uncertainty put off many investors in 2019 and while they started to return after Mr Johnson won his ‘stonking majority’ in the election, we still think UK shares appear undervalued.

Another threat which should continue to hover over the markets in 2020 is trade tensions. The US and China seemed to make progress on the first phase of a trade deal at the end of 2019, but some of the most contentious issues have not been addressed. Meanwhile, tariffs- taxes on goods imported from abroad- will weigh on economic activity, and US President Donald Trump could turn his attention to other trading partners, like the EU.

How about the global economy?

An effect known as the inversion of the yield curve- where the yield (or the income) paid by short-term government bonds rose above the yield on their long-term equivalents- rattled the markets in 2019 because in the past it has tended to precede an economic slowdown. However, we do not believe a recession is imminent on this occasion as the curve reverted to its customary upward slope at the end of 2019 and other indicators, such as employment levels, remain strong.

While central banks seem set to keep interest rates low in 2020, the markets may also benefit from greater government spending. The Conservative party’s successful election campaign pledged to invest in the UK’s transport network, particularly in the north of England. Elsewhere, at the end of 2019 the EU unveiled its Green New Deal which aims to make the region’s economy more environmentally friendly, although there are questions about Germany’s commitment to the plan.

We expect the global economy to grow in 2020 at a slower than average pace but policy remains supportive to markets.

Can returns match 2019?

We doubt it, but they can still be positive.

US shares have led the financial markets over the last couple of years, propelled by President Trump’s tax cuts. Whether this trend continues in 2020 remains to be seen, as these kinds of populist policies are not sustainable. We think valuations in other regions look more attractive, for instance emerging markets which offer better growth prospects as long as the dollar does not strengthen against other currencies.

Investors will also closely monitor corporate earnings in 2020. They stagnated in 2019, and the ability of companies to boost profits could influence how shares perform.

Bonds may face a more challenging environment in 2020 with yields at historic lows, even negative in some countries, so we do not expect them to match the generous returns of the last few years. However, they provide valuable diversification within portfolios because investors revert to what are considered safe haven assets such as government bonds (as governments are less likely to default) during periods of uncertainty.

Our investment principles

As we enter the new decade, our key messages remain the same.

Firstly, do your holdings reflect your attitude to risk? A portfolio with a higher proportion of shares is more vulnerable to market fluctuations but offers potentially better returns in the long run. On the other hand, a portfolio with a larger allocation to bonds aims to deliver returns which are less sensitive to market turbulence.

Secondly, is your portfolio sufficiently diversified? Diversification means spreading your holdings across different types of investments and regions. That way, if one asset class underperforms, it should not disproportionately impact your returns.

And thirdly, do not let short-term distractions like Brexit uncertainty or trade tensions force you into knee jerk reactions when it comes to managing your portfolio. As the saying goes, time in the market is more important than timing the market.

Toni Meadows, Omnis Investments Chief Investment Officer

The value of your investments can fall as well as rise, and you may get back less than you invest.

Asia Pacific: Virus claims lives and spreads outside China

• Global shares fell as the death toll rose from the coronavirus outbreak and the number of reported cases reached nearly two thousand;
• Despite the Chinese government’s best efforts to contain the virus, it has spread to Europe, the US, Australia and other countries in Asia.
• Omnis view: Efforts to limit the spread of the virus may impact economic activity, especially in the travel and transport sectors. This could add to the market’s concerns over slowing global growth, lower corporate profit forecasts and falling commodity prices.

UK: Mixed week for sterling

• The pound fell against the US dollar as the Chancellor Sajid David said that the UK would not align with EU business regulations after Brexit;
• However, the pound recovered some of those losses after figures released by the Office for National Statistics showed the employment rate rose to its highest level since 1971 in the three months to November [1].
• Omnis view: Political uncertainty picked up again following the chancellor’s comments as ruling out regulatory alignment could mean a harder Brexit. Meanwhile, a strong jobs market may give the Bank of England pause for thought ahead of its next meeting on Thursday. Investors are currently assigning a 50% chance that interest rates will be cut.

Europe: ECB leaves interest rates unchanged

• The euro weakened against the US dollar after the European Central Bank (ECB) decided not to raise interest rates at its latest meeting on Thursday;
• There was further bad news for the euro when figures released by research firm IHS Markit showed EU business activity falling short of expectations in January.
• Omnis view: On a more encouraging note, activity in the export-heavy German economy, which is considered the engine of Europe, improved as trade tensions between the US and China eased.

Companies: Netflix misses on US subscribers

• Netflix beat profit forecasts in the final quarter of 2019, but its shares fell as it failed to meet expectations for new subscribers in the US.
• Omnis view: The markets would usually welcome Netflix’s results as technology shares have powered the markets over the last few years, but the streaming service faces increasing competition in the US. Fourth quarter earnings are still forecast to decline according to research firm FactSet, although by 1.9% rather than 2.4% reported the previous week [2].

LOOKING AHEAD - TALKING POINTS

Economic data

• Thursday- EU unemployment rate in December; US economic growth in the fourth quarter;
• Friday- Japanese unemployment rate in December.

Monetary policy

• Wednesday- Federal Reserve (US central bank) interest rate decision;
• Thursday- Bank of England interest rate decision.

Corporate earnings

• Facebook, Apple and Amazon are the next of the FAANG group of technology shares to report profits this week, alongside industry bellwether Caterpillar.

Brexit

• The UK officially leaves the EU on Friday and enters into a transition period which is due to end on 31st December.

[1] https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/timeseries/lf24/lms

[2] https://insight.factset.com/sp-500-earnings-season-update-january-24-2020

Omnis Investments is now tweeting daily updates. Follow us at: @OmnisInvest

This update reflects Omnis’ view at the time of writing and is subject to change.

The document is for informational purposes only and is not investment advice. We recommend you discuss any investment decisions with your Openwork financial adviser. Omnis is unable to provide investment advice. Every effort is made to ensure the accuracy of the information but no assurance or warranties are given.

LAST WEEK – KEY Takeaways

Global: China strives to contain coronavirus

• Global shares fell as the number of cases and the death toll from the coronavirus rose although the spread outside of China has been limited;
• The World Health Organization declared the outbreak an emergency, but it also said measures that disrupt international travel and trade were unnecessary.
• Omnis view: Just as there were signs of a recovery in global economic growth, the coronavirus is likely to curtail activity in China to such an extent that it impacts other regions. The key question is how long authorities will take to contain the spread of the virus. Once a tipping point is reached, activity will pick up again and make up for lost demand. For now, fear reigns but in previous outbreaks of this nature the impact on the markets has been temporary.

UK: Pound strengthens as Bank of England pauses

• The pound strengthened against the US dollar after the Bank of England (BoE) kept interest rates on hold at its meeting on Thursday;
• However, the Bank downgraded its forecast for UK economic growth over the next three years due to the impact of Brexit and a fall in business productivity.
• Omnis view: In recent months the BoE seemed willing to cut interest rates to counter any form of Brexit, so the decision to leave them unchanged could be seen as a vote of confidence in the UK economy. The Bank also switched its outlook for future rate rises from ‘limited and gradual’ to whenever necessary to manage inflation (rising prices).

US: No adjustment to interest rates but economy slows

• US shares briefly rallied as the Federal Reserve (US central bank) also decided against changing interest rates at its meeting last week;
• The US economy grew at 2.1% in the fourth quarter of 2019, its slowest pace since 2016, as consumer spending appeared to weaken[1].
• Omnis view: Economic growth may have slowed at the end of 2019, but not enough for the Federal Reserve to justify lowering rates now. We still think a cut is likely at some point this year.

Europe: Economic growth stalls

• There was bad news for European shares after economic growth in the eurozone slowed in the fourth quarter of 2019 as the French and Italian economies unexpectedly shrank.
• Omnis view: With interest rates already negative in the EU, the European Central Bank will have to consider other measures to boost the region’s economy, such as increasing its bond buying programme (known as quantitative easing).

Corporate earnings: Tech sector provides respite

• Apple, Facebook and Amazon all beat profit expectations in the fourth quarter of 2019, although shares in Facebook fell as its rate of growth slowed.
• Omnis view: Earnings fell in 2019, so we will be closely monitoring company reports in 2020 for signs of a recovery.

LOOKING AHEAD - TALKING POINTS

Economic data

• Wednesday- US imports, exports and balance of trade in December;
• Friday- Chinese imports, exports and balance of trade in January; US non-farm payrolls (job creation) in January.

[1] https://www.bea.gov/news/2020/gross-domestic-product-fourth-quarter-and-year-2019-advance-estimate

Omnis Investments is now tweeting daily updates. Follow us at: @OmnisInvest

This update reflects Omnis’ view at the time of writing and is subject to change.

The document is for informational purposes only and is not investment advice. We recommend you discuss any investment decisions with your Openwork financial adviser. Omnis is unable to provide investment advice. Every effort is made to ensure the accuracy of the information but no assurance or warranties are given.

China: Central bank response to coronavirus reassures markets

• The coronavirus weighed heavily on Chinese shares at the start of the week after the country’s stock market reopened following the new year holiday;
• However, Chinese shares recovered and other global shares rose as the People’s Bank of China took measures to support the domestic economy.
• Omnis view: There were signs that the spread of the virus was slowing, although it does not appear to have reached a tipping point yet. While the Chinese central bank is providing short-term support for the markets, the longer-term effect of the outbreak on the global economy remains to be seen.

Trade: China cuts tariffs on US goods

• Global shares received another boost when China announced it would cut tariffs- taxes on products imported from abroad- as part of the initial trade deal recently agreed with the US.
• Omnis view: By reducing tariffs, not only does China reaffirm its commitment to the first phase of the trade deal, but it also helps to offset the economic impact of the coronavirus.

UK: Return of Brexit uncertainty weighs on pound

• The pound fell against the US dollar early in the week after the Prime Minister said the UK would leave the EU at the end of the transition period even if the two sides fail to agree a free trade deal.
• Omnis view: Having won a sizeable majority in December’s general election, Boris Johnson is in a strong position to negotiate what he believes is a favourable free trade deal for the UK. However, keeping ‘no deal’ on the table means Brexit uncertainty has intensified again. The pound’s movements against the US dollar should provide a guide to what the markets think is the most likely outcome.

US: Robust economy supports shares

• There was good news for US shares when the Institute for Supply Management reported that industrial activity increased at a faster pace than expected in January;
• Meanwhile, the US economy beat forecasts to create 225,000 new jobs in January, according to the monthly non-farm payrolls report[1].
• Omnis view: The strength of the domestic economy reinforces the decision by the Federal Reserve (US central bank) to keep interest rates on hold at its latest meeting. A cut to rates may still be necessary later in the year, especially if the coronavirus slows global economic growth.

LOOKING AHEAD - TALKING POINTS

Economic data

• Tuesday- UK economic growth in the fourth quarter of 2019;
• Thursday- US inflation rate in January.

1 https://www.dol.gov/newsroom/releases/osec/osec20200207

Omnis Investments is now tweeting daily updates. Follow us at: @OmnisInvest

This update reflects Omnis’ view at the time of writing and is subject to change.

The document is for informational purposes only and is not investment advice. We recommend you discuss any investment decisions with your Openwork financial adviser. Omnis is unable to provide investment advice. Every effort is made to ensure the accuracy of the information but no assurance or warranties are given.

Last Week - Key Takeaways

Coronavirus: Markets await tipping point

• Global shares rallied at the start of the week as the spread of the coronavirus appeared to be slowing;
• However, they handed some of those gains back after China reported a rise in the number of new cases due to a change in the method officials are using to monitor the outbreak.
• Omnis view: Shares continue to fluctuate according to news of the spread of the virus. The markets are still waiting for new cases to plateau because that will mean it is under control and the risk to global economic growth should start to fade.

UK: Economy stagnates in final quarter of 2019

• The UK economy did not grow in the fourth quarter of 2019 compared with the previous three months, but it beat expectations to expand by 0.3% in December[1];
• Meanwhile, the pound strengthened against the US dollar after Sajid Javid resigned as Chancellor and was replaced by Rishi Sunak who is considered more likely to increase government spending in the upcoming budget.
• Omnis view: Brexit uncertainty appeared to weigh on the UK economy at the end of last year as growth in services and construction failed to offset a slowdown in business investment and manufacturing activity. The improvement in December coincided with the Conservative party’s comprehensive victory in the general election.

US: Corporate earnings boost shares

• Company profits helped US shares overcome concerns about the impact of the coronavirus and hit record highs;
• According to research firm FactSet, earnings in the fourth quarter of 2019 are expected to grow for the first time since 2018, and they are forecast to pick up sharply in 2020[2].
• Omnis view: Profits are one of the key drivers of share valuations, so the positive outlook has buoyed the markets. However, forecasts could be downgraded if authorities struggle to contain the coronavirus and it continues to hamper global growth.

Europe: Shares rally despite slowing economy

• European shares rallied even though the region’s economy grew at its slowest pace in seven years in the fourth quarter of 2019.
• Omnis view: Shares reacted positively to what would normally be considered negative news because it increases the likelihood that the European Central Bank will take steps to support the economy, which the markets would welcome. Earnings season for European companies has also been fairly positive to date.

LOOKING AHEAD - TALKING POINTS

Economic data

• Monday- Japanese economic growth in the fourth quarter of 2019;
• Tuesday- UK unemployment rate in December;
• Wednesday- UK inflation rate in January;
• Friday- Japanese inflation rate in January.

Central banks

• Wednesday –The Federal Reserve (US central bank) publishes minutes from its latest meeting.

1 https://www.ons.gov.uk/economy/grossdomesticproductgdp/bulletins/gdpmonthlyestimateuk/december2019

2 https://insight.factset.com/sp-500-reporting-earnings-growth-for-the-first-time-since-q4-2018

Omnis Investments is now tweeting daily updates. Follow us at: @OmnisInvest

This update reflects Omnis’ view at the time of writing and is subject to change.

The document is for informational purposes only and is not investment advice. We recommend you discuss any investment decisions with your Openwork financial adviser. Omnis is unable to provide investment advice. Every effort is made to ensure the accuracy of the information but no assurance or warranties are given.

Coronavirus: Shares fall as new cases reported

• Measures taken by the People’s Bank of China (the Chinese central bank) to offset the impact of the coronavirus helped global shares rally early in the week;
• However, investors shifted their money out of shares and into government bonds- considered safe haven assets during times of market turbulence- at the end of the week as new cases were reported in China, South Korea and Europe.
• Omnis view: To a degree, shares are relying on support from the Chinese central bank, but that was not enough to prevent the sell-off on Friday. The markets will continue to fluctuate until the spread of the virus reaches a tipping point. The longer this takes to materialise, the greater the impact on global economic growth.

UK: Business activity continues to grow

• UK business activity increased for the second month in a row in February, according to figures released by research firm IHS Markit[1].
• Meanwhile, the annual inflation rate in the United Kingdom jumped to 1.8% in January, its highest level in six months, up from 1.3% in December and above market expectations.[2]
• Omnis view: UK businesses are benefiting from a more stable political backdrop since the Conservative party’s comprehensive victory in the general election, although Brexit uncertainty could intensify later in the year as talks over a free trade deal get underway.

US: Slowing business activity weighs on shares

• There was bad news for US shares as figures released by IHS Market showed business activity declining in February to its lowest level since 2013[3];
• However, the outlook for the US economy has improved slightly, according to the minutes of the latest Federal Reserve (US central bank) meeting.
• Omnis view: The minutes suggested the Federal Reserve would not change interest rates for the time being, although they discussed lowering them at January’s meeting. We still expect the Fed to keep rates low for the rest of the year.

Japan: Economy shrinks in final quarter of 2019

• Japanese shares fell after figures released by the Cabinet Office showed that the country’s economy shrank by 6.3% (on an annualised basis) in the fourth quarter of 2019[4].
• Omnis view: A rise in a sales tax introduced in October has weighed on the Japanese economy to a greater extent than expected. The government and the Bank and Japan have pledged to continue to take whatever measures are necessary to support it.

LOOKING AHEAD - TALKING POINTS

Economic data

• Thursday – European business climate indicator;
• Friday - Japanese unemployment rate in January.

1 https://ihsmarkit.com/research-analysis/flash-uk-pmi-signals-economic-rebound-sustained-into-february-February2020.html

2 https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/l55o/mm23

3 https://ihsmarkit.com/research-analysis/us-flash-pmi-signals-first-fall-in-business-activity-since-2013-Feb20.html

4 https://www.esri.cao.go.jp/en/sna/data/sokuhou/files/2019/qe194/pdf/gaiyou1941_e.pdf

Omnis Investments is now tweeting daily updates. Follow us at: @OmnisInvest

This update reflects Omnis’ view at the time of writing and is subject to change.

The document is for informational purposes only and is not investment advice. We recommend you discuss any investment decisions with your Openwork financial adviser. Omnis is unable to provide investment advice. Every effort is made to ensure the accuracy of the information but no assurance or warranties are given.

Global stock markets fell sharply yesterday (Monday 24 February) as reports from Japan, South Korea, Iran and Italy stoked fears over the global spread of the coronavirus. Among the notable falls, FTSE MIB index of Italian shares ended the day 5.4% lower after authorities moved to lock down ten towns in the country’s north to prevent the virus spreading. Meanwhile, the S&P 500 index of US shares fell 3.4%, erasing its year-to-date gains. While stock markets dropped, safe haven assets which investors typically turn to in times of market turbulence, such as high quality government bonds, rallied. The extent of concern among investors was clearly signalled by a sharp rise in the Vix index which is commonly known as “Wall Street’s fear gauge”.

Figure 1: The Vix index: Wall Street’s fear gauge

Source: Bloomberg

While the coronavirus poses obvious healthcare threats, the threat to investors might be less clear. In short, efforts to limit the spread of the virus – particularly in China – have caused factories to shut their doors and encouraged consumers to stay at home. This has disrupted global supply chains, leading to a shortage of some key components, and undermined retail sales. Against this backdrop, companies have begun to reduce their profit forecasts for the first quarter of the year. The impact has been most pronounced among airlines, cruise ship operators and commodity (e.g. oil and precious metal) producers. However, as illustrated by Mastercard’s recent profit warning, a wide range of companies are likely to be affected.

So, should we be joining the panic and selling shares where possible? The answer is complicated by the fact that no-one knows exactly how great the pandemic threat really is. While we take some comfort from the response – both in medical and investment terms – to previous outbreaks such as SARS and African Swine Flu, there is little way of knowing how relevant these episodes are to the current situation. Nonetheless, we can argue that, historically, selling shares at this stage would lock in losses and forego future gains.

Though some questions remain over the strength of future company profits, we believe that in most scenarios the impact of the virus should prove temporary. Once contained, manufacturing activity should recover while consumers may well make up for the purchases they have recently deferred. Furthermore, to our minds, valuations are all important. The recent sell-off has left the majority of global stock markets at valuation levels we consider reasonable, even against a more uncertain outlook for profits. In short, we are more likely to consider yesterday’s sell-off as an opportunity to top-up share holdings in OMPS portfolios rather than to cut them.

As ever, we will continue to monitor developments closely. Heeding the words of the seminal economist John Maynard Keynes, we must stand ready to change our minds if presented with a change in the facts. For now, however, we believe history, valuations and the economic outlook argue investors will be best served by maintaining their share holdings.

Colin Gellatly
Deputy Chief Investment Officer, Omnis Investments

Following its emergence in central China in mid-January, the coronavirus has now been reported in 56 different countries. Of the more than 83,000 confirmed cases, nearly 3,000 have proved fatal. Though the rate of new infections in China has stabilised, and though the proportion of patients recovering has improved, the international spread of the virus has caused a great deal of alarm. As workers, shoppers and tourists stay home – either by choice or by government edict – expectations for economic growth and corporate profits have been revised downwards.

This has prompted sharp movements in global financial markets. As measured by the MSCI All Countries World index, global equities had, by yesterday’s close (27th February) fallen close to 10% from their peak in sterling terms. Thus far, stock markets have continued their downward march today, with Asian markets down c.3% and, at the time of writing, European markets following suit. By some measures, this has been the worst week for global equities since the depths of the financial crisis in 2008.

In market terms, the past week can be characterised as a ‘flight to safety’. Investors have sold riskier assets, such as stocks, and bought ‘safe haven’ assets such as high-quality government debt, including UK gilts.

Figure 1: While stocks have fallen, safe haven assets – such as gilts – have made gains

 

LAST WEEK – KEY TAKEAWAYS

Coronavirus: Shares fall as investors switch to bonds

• Concerns about the coronavirus continued to weigh on the markets, as global shares experienced their worst week since the 2008 financial crisis;
• Meanwhile, the yield (income paid) on long-term US government bonds fell below the yield on their short-term equivalents- an effect known as the inversion of the yield curve which has in the past preceded an economic slowdown.
• Omnis view: Investors have switched their money out of shares and into what are traditionally considered ‘safe haven’ assets such as government bonds as the virus continues to spread. This ‘flight to safety’ has pushed down yields on long-term bonds (as yields move in the opposite direction to price). However, we believe a recession is unlikely because global economies are still fundamentally strong and central banks will act to support activity.

UK: PM prepared to walk away from Brexit talks

• The pound weakened against the US dollar after the Prime Minister claimed he would be prepared to abandon negotiations with the EU if the two sides have not made sufficient progress on a free trade agreement by June.
• Omnis view: Boris Johnson will feel the Conservative party’s comprehensive victory in the general election in December gives him a mandate to at least threaten to walk away without a deal. It remains to be seen whether this tactic will do anything other than aggravate Europe.

Europe: Prospects of an initial trade deal with US improve

• Phil Hogan, the EU’s new trade commissioner, said he was optimistic about agreeing a ‘mini’ trade deal with the US after the US delayed tariffs- taxes on goods imported from abroad- in response to the EU’s support for its aircraft industry.
• Omnis view: US President Donald Trump had hinted that he would turn his attention to what he perceives as a trade imbalance between the US and the EU after concluding the first phase of an agreement with China, so the prospect of this mini deal means the global economy has one less risk to worry about as it deals with the outbreak of the coronavirus.

LOOKING AHEAD - TALKING POINTS

Economic data

• Tuesday- EU unemployment rate in January and inflation rate in February;
• Friday- US imports, exports and balance of trade in January; US non-farm payroll report (job creation) in February;
• Saturday- Chinese imports, exports and balance of trade in February.

Brexit negotiations

• Negotiations between the UK and the EU over a free trade deal start today.

Omnis Investments is now tweeting daily updates. Follow us at: @OmnisInvest

This update reflects Omnis’ view at the time of writing and is subject to change.

The document is for informational purposes only and is not investment advice. We recommend you discuss any investment decisions with your Openwork financial adviser. Omnis is unable to provide investment advice. Every effort is made to ensure the accuracy of the information but no assurance or warranties are given.

Coronavirus: Falling oil prices halt rate cut rebound

• Concerns about the impact of the coronavirus on the global economy continued to hit markets as the number of new cases rose around the world;
• The prospect of central bank support temporarily boosted shares in the middle of the week as the Federal Reserve (the US central bank) cut interest rates by 0.5%[1];
• However, falling oil prices dragged down shares at the end of the week after the Organization of the Petroleum Exporting Countries (OPEC) failed to agree output cuts with its partners.
• Omnis view: Lower oil prices reflect a drop in demand due to the coronavirus. Investors responded by moving money out of shares and into traditional safe havens such as government bonds, even though cheaper fuel can also benefit businesses. How quickly China, where the virus appears under control, returns to work is key for global economic growth. Likewise, how soon other regions contain the spread of the virus and therefore reduce fear levels. In the meantime, we expect governments and central banks to introduce further measures.

UK: Bank of England likely to cut rates

• Mark Carney, the outgoing governor of the Bank of England (BoE), told parliament that the committee which decides on monetary policy would be prepared to follow the example set by the Federal Reserve and cut interest rates to offset the impact of the coronavirus on the British economy.
• Omnis view: Mr Carney claimed the BoE could decide to lower rates before its next meeting on 26th March if necessary. He also said the bank is looking at other measures to support UK companies.

US: Job creation in February beat expectations

• There was some good news for the US economy when figures released by the Labor Department showed that 273,000 jobs were created in February[2].
• Omnis view: The number of jobs created exceeded forecasts and reaffirms the underlying strength of the US economy, but the news was not enough to offset the impact of lower oil prices on the country’s shares.

China: Exports drop in January and February

• Exports- goods produced in China but sold abroad- fared worse than expected in the first two months of the year, falling by 17% according to Chinese customs[3].
• Omnis view: The decline in exports shows how the coronavirus has disrupted supply chains and hampered businesses. However, there are signs that economic activity is picking up in China and other Asian countries as the number of new cases falls dramatically.

LOOKING AHEAD - TALKING POINTS

Economic data

• Monday- Japanese economic growth in the fourth quarter of 2019;
• Tuesday- Chinese inflation rate in February; European economic growth in the fourth quarter of 2019;
• Wednesday- UK economic growth in January; US inflation rate in February.

Monetary policy

• Thursday- European Central Bank interest rate decision.

UK budget

• The new Chancellor delivers his first budget on Wednesday.

1 https://www.federalreserve.gov/newsevents/pressreleases/monetary20200303a.htm

2 https://www.dol.gov/newsroom/releases/osec/osec20200306

3 http://english.customs.gov.cn/Statics/6c376734-a6b1-4b14-83c6-5a3ba61c5893.html

Concerns about the impact of the coronavirus on global economic growth have weighed on demand for oil. Over the weekend, talks took place between the Organization of the Petroleum Exporting Countries (OPEC) and other producers about cutting output to support oil prices, but they failed to come to an agreement. In response, Saudi Arabia, OPEC’s de facto leader, said it would raise production and lower prices in an effort to preserve its market share and win over new customers from rivals.

When the commodity markets opened on Sunday evening, oil prices plunged. Investors reacted on Monday morning by moving money out of riskier assets such as shares and into what are traditionally considered ‘safe haven’ assets like government bonds which fluctuate less in price during periods of turbulence. The FTSE 100 opened 8% lower, but recovered some of those losses in early trading.

The coronavirus outbreak has rattled markets. In China, where it originated, the authorities appear to have contained the virus, but it continues to spread internationally with new cases reported in most countries around the world. Italy has been hit particularly hard, with much of the northern part of the country now under lockdown.

Central banks have taken steps to limit the impact of the virus on the global economy. At its meeting last week, the Federal Reserve, the US central bank, cut interest rates by 0.5%. The Bank of England looks set to follow suit at its next meeting on 26 March, if not before, and the Chancellor of the Exchequer is expected to include various measures to help businesses when he announces the budget on Wednesday. Meanwhile, the International Monetary Fund has pledged US$50 billion to support developing countries struggling with the virus.

While the current turbulence may cause you some concern, try to avoid any knee jerk reactions. It’s important to remember to look on your portfolio as a long-term investment, with most portfolios designed to deliver returns over a period of at least five years. Although coronavirus may hinder the markets in the short term, we do not expect the effects to be long lasting.

Diversification, the spread of investments across different asset classes and regions, can also help. While bond holdings may not completely offset the losses caused by shares, they should offer a degree of protection as the market fluctuates.

If you have any questions about the impact of the coronavirus on your portfolio, please don’t hesitate to contact me.

This update reflects our view at the time of writing and is subject to change.

The document is for informational purposes only and is not investment advice. Every effort is made to ensure the accuracy of the information but no assurance or warranties are given.

The new single-tier State Pension will increase from £168.60 a week to £175.20 in April 2020. For pensioners receiving the older basic State Pension, this will increase from £129.20 to £134.25 per week (3.9% increase). For spouses/civil partners this will increase to £80.45 per week.

The rise is the result of the triple-lock system, which means that the State Pension rises in line with inflation, earnings or 2.5%, whichever is the highest.

Private pensions

To support the delivery of public services, particularly in the NHS, the two tapered Annual Allowance thresholds for pensions will each be raised by £90,000. So, from 2020-21 the threshold income will be £200,000, meaning individuals with income below this will not be affected by the tapered Annual Allowance. The Annual Allowance will only begin to taper down for individuals who have an adjusted income above £240,000 (the £200,000 allowance plus the £40,000 you can save into your pension). For every £2 of adjusted income over £200,000, the annual allowance will reduce by £1.

For individuals with income over £300,000 the minimum level to which the Annual Allowance can taper down will reduce from £10,000 to £4,000 from April 2020.

The Lifetime Allowance for pensions will increase in line with the Consumer Prices Index (CPI) for 2020-21, rising to £1,073,100.

Annual allowance charge on excess is at applicable tax rate(s) on earnings
Lifetime allowance charge if excess if drawn as cash 55%; as income 25%
Pension commencement lump sum up to 25% of pension benefit value

If you would like to know more about how pension allowances may impact your retirement planning please get in touch.

HM Revenue and customs practice and the law relating to taxation are complex and subject to individual circumstances and changes that cannot be foreseen.

The FTSE 100 and the Stoxx 600 index of European shares both fell 6% when the stock markets opened, with the travel and leisure sectors coming under the most pressure. Oil prices, which weighed on the markets at the start of the week due to a price war between the Organization of the Petroleum Exporting Countries (OPEC) and its partners, dropped again as demand is likely to fall from airlines.

President Trump’s announcement followed the World Health Organisation’s decision on Wednesday to classify the coronavirus as a ‘pandemic’ meaning it is spreading around the world. This classification does not change the threat level, but it should encourage countries to take extra measures to contain the virus, which the markets would welcome.

The spread of the coronavirus has accelerated in the West, and many of the major share indices are experiencing or on the verge of a bear market- traditionally defined as a 20% decline - for the first time since the 2008 financial crisis.

However, the number of new cases in China has fallen dramatically. The Chinese are slowly returning to work, which will ease the pressure on supply chains. Fear levels remain high, but if the virus can be contained, and governments and central banks continue to offer support, the overall disruption to the global economy could end up lower than currently expected by the markets.

Understandably, many investors are concerned about the impact on their portfolios. The advice remains the same - try to avoid making any rash decisions. Portfolios are designed to deliver returns over the longer term, and there have been periods like this in markets before. Although the current turbulence may be hard to stomach, it should turn out to be temporary. Investors are usually rewarded for staying in the market.

Diversified portfolios, where investments are spread across different asset classes and regions, offer further peace of mind. The theory behind diversification is that if one asset class or region underperforms, others should make up for it. While shares have tumbled over the last couple of weeks, investors have moved their money into bonds which could help to offset those losses.

Finally, each client’s portfolio should reflect their attitude to risk. Portfolios with a greater proportion of shares may underperform while the coronavirus hovers over the markets, but they tend to deliver better returns in the long term. On the other hand, returns from portfolios with a higher allocation to bonds should fluctuate less in the short term.

Toni Meadows
Chief Investment Officer
Omnis Investments Limited

Issued by Omnis Investments Ltd. This update reflects Omnis’ view at the time of writing and is subject to change. The document is for informational purposes only and is not investment advice. We recommend you discuss any investment decisions with your Openwork financial adviser. Omnis is unable to provide investment advice. Every effort is made to ensure the accuracy of the information but no assurance or warranties are given.

The Omnis Managed Investments ICVC and the Omnis Portfolio Investments ICVC are authorised Investment Companies with Variable Capital. The authorised corporate director of the Omnis Managed Investments ICVC and the Omnis Portfolio Investments ICVC is Omnis Investments Limited (Registered Address: Washington House, Lydiard Fields, Swindon, SN5 8UB) which is authorised and regulated by the Financial Conduct Authority.

Coronavirus: Toughest week for markets in over 30 years

• Global shares fell at the start of the week after a disagreement between the Organization of the Petroleum Exporting Countries (OPEC) and other producers about cutting output led to a drop in oil prices;
• On Wednesday, concerns about the market for Treasuries- US government bonds which are considered among the least risky asset class as the likelihood of default is so low- further weighed on shares;
• Later that day, US President Donald Trump banned travel from many European countries to the US, and shares dropped again when the markets opened on Thursday;
• However, shares recovered on Friday as the Federal Reserve (the US central bank) pledged US$5 trillion to support the Treasury market, and President Trump’s allocation of US$50 billion to fight what has been classified a national emergency boosted US shares.
• Omnis view: Governments and central banks (see below) are upping their efforts to support the global economy and minimise the effect on the markets. The turbulence may be dominating the headlines for now, but the impact of the virus is expected to be temporary, while the policies introduced recently should last much longer.

Central banks: Coordinated response to coronavirus

• The Bank of England (BoE) cut interest rates by 0.5% at an unscheduled meeting on Wednesday and introduced measures to encourage banks to continue lending throughout the crisis;
• The European Central Bank (ECB) expanded its bond buying programme- known as quantitative easing (QE)- but it did not lower rates which are already negative;
• At another unscheduled meeting on Sunday, the Federal Reserve reduced interest rates to zero and announced an increase to QE.
• Omnis view: Central bank support is key to the global economy overcoming the impact of the coronavirus, although governments also need to take further action to calm investor’s fears. The steps taken by the BoE and ECB were overshadowed by concerns about Treasuries and President Trump’s travel ban. To make matters worse, the markets did not feel that the ECB went far enough.

UK: Chancellor uses budget to tackle coronavirus

• New Chancellor Rishi Sunak provided further support for the UK economy when he delivered his first budget on Wednesday, announcing £12 billion worth of tax cuts and government spending.
• Omnis view: The Chancellor delivered the most expansive budget since the early 90s, featuring a range of policies designed to ease concerns and reduce uncertainty for both businesses and the public as the number of new cases of the virus rise in the UK.

Commodities: Saudi Arabia escalates oil price war

• Saudi Arabia escalated the price war with OPEC’s partners on Tuesday by pledging to increase its daily output of oil to a record level in April.
• Omnis view: While the markets already have a lot to deal with, a lower oil price will particularly hamper energy-heavy indices like the FTSE 100. Shale gas companies in the US also look vulnerable.

LOOKING AHEAD - TALKING POINTS

ECONOMIC DATA

• Tuesday- UK unemployment rate in January;
• Thursday- Japanese inflation rate in February.

Monetary policy

• Monday- Bank of Japan interest rate decision;
• Wednesday- Federal Reserve meeting.

A number of lenders had already announced repayment holidays for those affected by Covid-19, but the Government's announcement means ALL lenders will now have to honour the three-month time frame.

A mortgage payment holiday is an agreement you will need make with your lender allowing you to temporarily stop or reduce your monthly mortgage repayments. Lenders have advised that anyone struggling with repayments should contact them directly. The repayment holiday will be available to borrowers who are up to date on their mortgage payments and not already in arrears. If you believe you will struggle to make repayments in the coming months, I would recommend you engage with your lender as soon as practical to agree the best way forward, which may or may not include a payment holiday.

Interest will accrue for the period of the holiday and payments missed will be added to the loan and repaid in the future - potentially over the remaining term of the loan. The credit reference agencies are engaged with the lenders and it is anticipated that borrowers’ credit files will not be negatively affected as a result of the three month payment suspension.

As your adviser I am here to help, so if you have any questions around either engaging your lender or more broadly around your protection policies or the wider impacts of the Coronavirus on your financial position please do get in touch.

As a direct consequence of the COVID-19 outbreak, global stock markets are suffering a period of turbulence. When markets move significantly it can prove very challenging to hear through the noise and focus on the bigger picture.

Lessons from history

Over recent years many investors have become used to a variety of political, financial and economic factors impacting markets, from the Brexit Referendum and subsequent prolonged uncertainty, to the global financial crisis and even further back to the dotcom bust in the early noughties. Although markets do not respond well to periods of uncertainty, fluctuations go hand in hand with stock market investment; and while market movements can be concerning, experience has taught us to expect the unexpected.

It is important to remember that some market turbulence is inevitable; markets will always move up and down. As an investor, putting any short-term fluctuations into historical context is useful. Investors with diversified portfolios, who stay in the market, have typically been rewarded over time.

Plan and focus, be strategic

Instead of being too worried by turbulence, the best strategy is to be prepared. It is best to stick to your well-defined plan and diversify your holdings, as well as expecting and accepting market movements. Your plan will be tailored to your objectives, in line with your attitude to risk and will take into account your financial situation, which will stand you in good stead to weather short-term market fluctuations.

In it for the long haul

Even though it can be difficult to ignore daily market movements, it is vital to focus on the long term, and remember that turbulence also presents investment opportunities. Investment requires a disciplined approach and a degree of holding your nerve if markets descend. Investment professionals know that markets can fluctuate and will inevitably go down as well as up from time to time. The worst investment strategy you can adopt is to jump in and out of the stock market, panic when prices fall and sell investments at the bottom of the market.

Keep calm and carry on

On the day of the Budget, the outgoing Chairman of the Bank of England, Mark Carney and the Chancellor, Rishi Sunak, were keen to highlight the temporary nature of the downturn, that is worth bearing in mind. Both the BoE and the Chancellor have taken steps to support the UK economy, which should also help to calm the markets. The BoE has cut interest rates on two occasions and expanded its bond buying programme, known as quantitative easing. Meanwhile, Mr Sunak announced a package of emergency measures for UK businesses worth £350 billion.

As Rudyard Kipling wrote, it is important to “keep your head when all about you are losing theirs” – a clear head will certainly stand you in good stead through these challenging times.

Market turbulence is a timely reminder to keep your investments under regular review – that is what we do best. Please rest assured we are working hard to manage the fluctuations, so your money has the best chance of growing for the future.

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.

Focus on the Horizon

1. Coronavirus Business Interruption Loan Scheme

 The Chancellor announced support for small businesses in the budget on 11 March. Details are subject to clarification but the scheme has been extended and brought forward to 23 March.

It will be provided through participating provider banks and will offer more attractive terms for both businesses applying for new facilities and lenders, with the aim of supporting the continued provision of finance to UK businesses during the Covid-19 outbreak.

The scheme provides the lender with a government-backed guarantee against the outstanding facility balance, potentially enabling a ‘no’ credit decision from a lender to become a ‘yes’. The borrower always remains 100% liable for the debt.

The maximum value under the scheme will be £5 million.

The Government will cover the first 12 months of interest payments, so businesses will benefit from lower initial repayments. The business remains liable for repayments of the capital.

As well as loans, there are many other types of finance supported by the programme, depending on the provider.

Eligibility:

•  UK based SMEs with turnover of no more than £41 million per annum

•  Be able to confirm that they have not received de minimis State aid beyond €200,000 equivalent over the current and previous two fiscal years

•  Have a sound borrowing proposal, but insufficient security to meet the lender’s requirements

Current details here »

2. Coronavirus Job Retention Scheme

•  Employers will be able to contact HMRC for a grant to cover most of the wages of their workforce who remain on payroll but are temporarily not working during the coronavirus outbreak.

•  Grants will cover 80% of the salary of retained workers, up to a total of £2,500 a month.

•  Grants are backdated to 1 March 2020 and the scheme is expected to be up and running by the end of April 2020.

Current details here »

3. VAT payments

•  VAT payments due between now and the end of June 2020 will be deferred.

•  No VAT registered business will have to make a VAT payment normally due within their VAT return to HMRC in that period.

4. Income tax payments

•  Income tax payments due in July 2020 under the Self-Assessment system will be deferred to January 2021.

5. Universal Credit

•  The Universal Credit standard allowance and Working Tax Credit basic element will be increased for the next 12 months by £1,000 a year.

6. Renters

•  Nearly £1 billion of additional support for renters, through increases in housing benefit and Universal Credit.

•  From April, local Housing Allowance rates will pay for at least 30% of market rents in each area.

A financial support package for the self-employed is also expected this week.

The Government has launched a new website that helps businesses find out how to access the support that has been made available, who is eligible, when the schemes open and how to apply - https://www.businesssupport.gov.uk/coronavirus-business-support/

GOV.UK site – support for businesses - https://www.gov.uk/government/publications/guidance-to-employers-and-businesses-about-covid-19/covid-19-support-for-businesses

GOV.UK site – guidance for employees - https://www.gov.uk/government/publications/guidance-to-employers-and-businesses-about-covid-19/covid-19-guidance-for-employees

Richardson Swift Chartered Accountants – resources for the self-employed - http://www.richardsonswift.co.uk/news-and-comment/coronavirus-resources-for-the-self-employed

Markets: Shares fluctuate despite government and central bank measures

• Global shares fell sharply at the start of the week after governments introduced stricter rules to contain the spread of the coronavirus;
• Further support from governments and central banks helped stock markets recover slightly on Tuesday, but they dropped again on Wednesday as concerns about the impact of the virus on the global economy returned;
• Those concerns also weighed on government bonds- usually considered a safe have asset in times of market turbulence as governments tend not to default- which fell on Wednesday.
• Omnis view: The extensive measures announced by authorities appeared to have offered some support to the markets by the end of the week. However, US shares subsequently tumbled on Friday as New York and California brought in new social distancing rules. The markets are likely to continue fluctuating until governments manage to contain the virus and the impact on the global economy becomes clear.

Central banks: Efforts ramped up to support global economy

• The Bank of England cut interest rates for a second time in a week to the lowest level ever and pledged to expand its bond buying programme- known as quantitative easing (QE)- to bonds issued by large companies;
• The Federal Reserve- the US central bank- also said it would buy corporate bonds and took other measures to ensure money continues to flow through the financial system;
• The European Central Bank announced it would significantly increase its programme of QE and do whatever it takes to support the euro;
• Omnis view: With interest rates at historic lows, central banks are employing a wider range of tools to limit the impact of the coronavirus on the global economy in the short run. These measures should also accelerate the recovery over the longer term.

UK: Chancellor launches further round of measures

• The Chancellor Rishi Sunak announced a package of emergency measures to support the British economy, including loan guarantees worth over £300 billion and a pledge to cover 80% of employee wages for three months;
• Meanwhile, the pound weakened to its lowest level against the US dollar since the 1980s, although the fall was partly explained by increasing demand for dollars which are another ‘safe haven’ in periods of market turmoil, especially for companies.
• Omnis view: While the latest measures should ease immediate concerns, their ultimate success will depend on whether they manage to protect jobs and avoid bankruptcies.

China: Evidence of the economic impact of coronavirus starts to emerge

• Figures published by China’s National Bureau of Statistics showed that industrial activity fell dramatically in January and February, and unemployment rose sharply in February.
• Omnis view: These figures are the first indication of the effect of the coronavirus on the Chinese economy. Whether other countries experience a similar economic slowdown remains to be seen, although the steps taken by governments and central banks (outlined above) are designed to minimise the impact.

Commodities: Oil prices continues to fall

• The coronavirus and the subsequent price war between the Organization of the Petroleum Exporting Countries (OPEC) and its partners continued to weigh on oil prices which hit their lowest point in 17 years.
• Omnis view: Talks between OPEC and US producers about cutting output could help ease the pressure on the oil markets.

LOOKING AHEAD - TALKING POINTS

Economic data

• Wednesday- UK inflation rate in February.

Monetary policy

• Thursday- Bank of England’s latest meeting.

In recent weeks, investors may have become accustomed to seeing markets lurch lower day by day. The gains made this week – by some measures the strongest since 1931 – are therefore particularly welcome. While it is too early to sound the all clear, and while we would caution against attempts to ‘call the bottom of the market’, we believe the outlook is improving. Consequently, at current levels, we see compelling opportunities for longer-term investors in stock markets.

On Friday night, Fitch downgraded the government debt rating for the UK to AA- from AA. Fitch is one of the top three independent agencies (the others being Moody’s and Standard & Poors) that assess the risk of companies or governments not being able to pay back their debt. It is nothing to worry about for the UK as our debt is still close to the top rating on a scale that runs from AAA to BBB in investment grade with 11 possible levels based on intermediate classifications of +/-. The Fitch ratings break down as shown below. Each agency has its own scale, but they tend to agree on the level of rating to apply to each issuer

Investment grade

• AAA : the best quality companies, reliable and stable
• AA : quality companies, a bit higher risk than AAA
• A : economic situation can affect finance
• BBB : medium class companies, which are satisfactory at the moment

Non-investment grade

• BB : more prone to changes in the economy
• B : financial situation varies noticeably
• CCC : currently vulnerable and dependent on favourable economic conditions to meet its commitments
• CC : highly vulnerable, very speculative bonds
• C : highly vulnerable, perhaps in bankruptcy or in areas but still continuing to pay out on obligations
• D : has defaulted on obligations and Fitch believes that it will generally default on most or all obligations
• NR : not publicly rated

These ratings may influence the level of compensation (yield) that investors require from the company or government to hold their debt. In the case of a country it may also impact the value of its currency, meaning a downgrade could cause it to fall in value, at least in the near term.

With regard to the UK downgrade, Fitch stated:
“The downgrade reflects a significant weakening of the UK's public finances caused by the impact of the Covid-19 outbreak and a fiscal loosening stance that was instigated before the scale of the crisis became apparent,”. They go on to say it also “reflects the deep near-term damage to the UK economy caused by the coronavirus outbreak and the lingering uncertainty regarding the post-Brexit UK-EU trade relationship."

Many countries are having to restrict freedom of movement to combat the spread of the virus and this has led to a sudden loss of economic activity. To counter the impact of this, governments and central banks have provided unprecedented levels of monetary and fiscal support that will push up debt levels. For any entity the combination of more debt and less revenue is a bad for investors and should lead them to require a higher level of yield to compensate for holding the debt of that entity.

Ultimately there will be a slew of ratings downgrades for many countries and companies during this period of disruption. Just last week Moody’s downgraded a number of European nations and South Africa was cut to junk (non-investment grade). The impact for the UK from being downgraded is likely to be small given that our debt is regarded as high-grade quality, even at the lower rating. Where the rating becomes more of an issue is when a country or company moves from investment grade to non-investment grade or junk status as was the case with South Africa. As that level the ratings agencies are signalling a higher risk that the entity will not be able to service its debt and you would expect a bigger reaction from markets in terms of higher yields and currency weakness.

It remains to be seen what impact the downgrade has on UK assets, but we expect it to be short-lived. Your portfolio of investments is designed to be diversified across regions of the world and depending on your attitude to risk to include a range of different assets designed to spread risks. This means that your exposure to any individual event like this is reduced.

Toni Meadows
Chief Investment Officer
Omnis Investments Limited

Markets: Global shares recover as US announces substantial government support

• Markets rallied as the US launched a package of emergency measures worth US$2 trillion in an effort to offset the impact of the coronavirus on the country’s economy (see below);
• Concerns about their potential impact weighed on the markets on Friday, but shares still recorded healthy gains for the week.

• Omnis view: The markets welcomed the measures which are broader than those launched in response to the 2008 financial crisis. However, whether shares continue to recover depends on global efforts to contain the virus and the trajectory of the number of new cases.

US: Federal Reserve and government unite to bolster economy

• The Federal Reserve- the US central bank- put no limit on the amount of government and corporate assets it will buy through its expanded programme of bond buying, known as quantitative easing;
• As part of the US$2 trillion of measures signed into law by President Trump on Friday, the US will offer emergency loans to businesses and send money directly to consumers.

• Omnis view: These measures are designed to protect businesses and jobs and ensure the financial system continues to function during the temporary shutdown of economic activity. Handing money to consumers should boost demand and drive future growth.

Global economy: Coronavirus weighs on business activity and employment

• Evidence of the impact of the coronavirus on the global economy emerged as business activity in the UK, the US and Europe slowed to the lowest point since analytics firm IHS Markit started measuring in 1996;
• Meanwhile, the number of people claiming unemployment benefits in the US rose by over three million last week, according to the US Labor department[1]

• Omnis view: While a recession- two quarters of negative economic growth- is likely in the first half of the year, the measures put in place by global authorities could lead to a relatively quick rebound if the spread of the virus can be contained

LOOKING AHEAD - TALKING POINTS

Economic data

• Tuesday- Japanese unemployment rate in February;
• Wednesday- EU unemployment rate in February;
• Thursday- US imports, exports and balance of trade in February;
• Friday- US non-farm payroll report (job creation) in March.

[1] https://www.dol.gov/ui/data.pdf .

Government action:
The Government have introduced the Coronavirus Act (2020) which establishes a set of guidelines for tenants and landlords to follow. They have stated that there is not a ‘one size that fits all’ approach to dealing with specific landlord-tenant situations and that frank, honest conversations are needed to establish the needs of the tenant to allow landlords to assist and provide support.

The Government has also announced the extension of the provision of three-month mortgage repayment holidays to include But to Let mortgages.

Lender action:
Alongside government guidelines, lenders are doing all they can to offer some support through mortgage repayment holidays.
Frequently Asked Questions (FAQs) are available on most lenders’ websites specific to Covid-19 and helplines/online chats are available providing clarification as to how borrowers can request a repayment holiday.

In many cases lenders are providing specific information for Buy to Let borrowers, whose circumstances may come with more complications than a residential mortgagor.

Product availability:
There has been a noticeable decrease in the availability of mortgage products over the past couple of weeks particularly, those designed to support more specialist requirements including Buy to Let. In some cases, lenders have chosen to withdraw Buy to Let products altogether or to cap the loan to value (LTV) they are willing to lend up to. 

The key challenge for lenders is the suspension of the ability to undertake the physical valuations of properties. However, an increasing number of lenders are moving rapidly to offering “desktop” valuations, involving a valuer assessing the property using online data. We are already seeing the result of this move with more higher LTV products starting to emerge. This trend will increase over the coming weeks, which should help ensure more products become available.

Some frequently asked questions

Can I get a mortgage holiday with my Buy to Let mortgage?
The Government has recognised the financial pressure that landlords are facing with the Covid-19 outbreak. They have announced that a three-month mortgage holiday will be valid for Buy to Let mortgages as well as residential mortgages. This will alleviate the pressure on landlords and tenants who will be concerned about paying their mortgage and rent.

If you are looking to re-mortgage in the next six months, but will require a payment holiday, please speak to me before engaging your lender, as this may influence the mortgage products available to you.  

I’m a limited company, can I apply for a mortgage holiday?
Yes, UK Finance, which represents the banking industry, has confirmed that the mortgage holiday for Buy to Let landlords will also apply to those who have mortgages through limited companies.

Should I take a mortgage holiday?
If your finances have been affected because of coronavirus and you have consent from all named participants on the mortgage, you are able to apply for a three-month mortgage repayment holiday.

However, I would stress that this is not free money and that you will need to make up the missed payments in due course. At the end of the three-month holiday, you will need to agree higher repayments moving forward with your lender or extend the term of your mortgage. As such, taking a holiday will cost you more in the longer-term. My recommendation would therefore be to not take a holiday unless you really need to.

My tenants can’t pay their rent, what do I do?
Responsibility falls onto the landlord to reach out to their tenant(s) to establish whether they are under financial strain and therefore unable to pay their rent. Landlords are encouraged to show compassion to their tenants and help them to remain in their homes.

Both the Building Societies Association and UK Finance have announced that there will be no repossession actions taking place for the next 90 days, this applies to homeowners and landlords. In addition, tenants cannot be evicted from their home over the next three months.

In the case that renters are unable to keep up with monthly payments, landlords and tenants are encouraged to work together to come up with a repayment plan, while taking into account the tenants’ specific circumstances at the end of this period.
 

Can I also claim for a mortgage holiday if my tenant is still paying their rent?
Those tenants who can still pay their rent should continue to do so as normal. If your tenant is still paying their rent but your main source of income from a full/part-time job has stopped and you are unable to pay off your mortgage/outgoings, then you are able to apply for a mortgage holiday providing you have been paying your mortgage in a timely manner up to this point.

What is the position on repossessions?
If you have not been, or are unable to, make payments then following government intervention mortgage lenders have suspended possession orders and will not start new court actions for three months (as of 19 March).

Your property may be repossessed if you do not keep up repayments on your mortgage.

I have exchanged on a new property, but not moved in. What should I do?

The Government has stated that they do not want you to move during the lockdown, unless it is in exceptional circumstances. If you can therefore delay your move then you should. Mortgage lenders are now extending the expiry date on offers by three months to hopefully allow more time, while many solicitors are adding new clauses into contracts in case purchases don’t progress.

I have completed on a new property, but not moved in. What should I do?

As with exchanges, the Government is requesting that moves don’t occur unless there is no option. If you do have to move, then take extra precautions to adhere to the social distancing rules.

Can I qualify for a repayment holiday?

All lenders are required by the Government to offer borrowers the opportunity to take a three-month payment holiday. This is true for all homeowners, Buy to Let mortgages and for clients who have used the Government's Help to Buy scheme. The repayment holiday is available to borrowers who are up-to-date on their mortgage payments and not already in arrears.

Should I take a repayment holiday?

We believe that over 1 million borrowers have already requested a holiday and if you are in a position where you will struggle to meet your monthly mortgage payments, then it is a sensible thing to do. You won’t need to go through a means test or demonstrate your income drop. There also isn’t a fee to pay. However, I would stress that this is not free money and that you will need to make up the missed payments in due course. Instead at the end of the three month holiday, you will need to agree higher repayments moving forward with your lender or extend the term of your mortgage. As such, taking a holiday will cost you more in the longer-term. My recommendation would therefore be to not take a holiday unless you really need to.

Also, if you are coming up to the end of term on your existing mortgage deal, then be aware that taking a repayment holiday could impact on whether or not you can qualify for a re-mortgage or a new deal with your existing lender. Please therefore talk to me first before applying.

It's important that you don’t cancel your direct debit to the lender. Simply cancelling the direct debit may cause issues later down the line when you come to the end of your payment holiday and could cause you to miss a mortgage payment in the future. A missed mortgage payment will show on your credit file.

I can’t get through to my Lender. What should I do?
All of the lenders have been swamped with calls from borrowers about repayment holidays at a time when they were also trying to move significant numbers of staff to remote working. Many have consequently struggled to cope, leading to long waiting times. I would therefore encourage you to wait a few days for things to quieten down and try again or alternatively look on the lenders website. Most have detailed information on their response to COVID-19 and how to request a repayment holiday.

I am coming to the end of my current mortgage deal. Should I re-mortgage?

A significant number of products, particularly trackers and those at higher loan to value’s, have been withdrawn by the lenders in recent days. However, over 10,000 products are still available and rates remain at historically very competitive levels. Funding may become more constrained in future, so if you are within six months from the end of your current deal, please get in touch and I’ll talk you through the options available.

My income has dropped. How will this impact on my ability to get a mortgage?

All lenders look at your current income and any expected or known changes when they assess whether you can afford a mortgage. With access to a comprehensive range of lenders from across the market, I can help you find a mortgage that’s right for you and that is affordable based on your income and expenditure.

I am looking to buy a property. Should I continue?

The number of property transactions are dropping fast and we expect the market to be in a state of suspended animation for at least the next two to three months.  As such, even if you wanted to make a purchase you would find it difficult, unless it was a property you already knew and therefore didn’t need a survey and were buying with cash only. There are plenty of commentators predicting a big fall in house prices, but in reality this is guesswork and it will be many months before it is clear whether or not prices have been impacted. Most property purchases are made for a reason – perhaps clients need more or less space, or they are changing work location - so on that basis alone I expect the market to gradually re-start once the immediate lock-down eases. 

Your home may be repossessed if you do not keep up repayments on your mortgage.

Markets: Shares react to economic data

• Global shares started the week on a positive note, boosted by figures suggesting the Chinese economy was showing signs of recovery following the coronavirus outbreak (see ‘Asia’ section);
• However, concerns about the potential number of deaths in the US and the impact of the virus on the global economy, particularly on US employment, weighed on the markets later in the week (see ‘US’ section).
• Omnis view: The markets appear to have stabilised following the severe turbulence in March caused by the spread of the coronavirus outside China. They are likely to remain sensitive to the effectiveness of global efforts to combat the virus and may continue to fluctuate until the number of new cases in the US and Europe starts to decline.

Asia: Chinese slowly returning to work

• Chinese industrial activity rebounded in March after it was dragged down in February due to measures taken to contain the spread of the coronavirus.
• Omnis view: The increase in industrial activity is encouraging as it signals that Chinese people are returning to work. However, it was recovering from a low level, so the country’s economy still has some way to go before it is back to full capacity.

US: Unemployment rises as country locks down

• Further evidence of the economic impact of the coronavirus emerged as the number of people claiming unemployment benefits in the US jumped to 6.6 million[1];
• Later in the week, the non-farm payroll report, a key measure of the US jobs market, revealed that employment fell by over 700,000 in March, its biggest drop since 2009[2].
• Omnis view: As the world’s largest economy, what happens in the US inevitably impacts the global markets. However, the US$2 trillion worth of emergency measures approved by US senators at the end of March should help the economy recover, and further support could be on the way.

Oil: Prospect of truce boosts prices

• The impact of the coronavirus on demand and the price war between the Organization of the Petroleum Exporting Countries (OPEC) and its partners weighed on oil prices which fell at the start of the week;
• However, they rallied after US President Donald Trump claimed to have brokered a truce between the two sides.
• Omnis view: Energy-heavy stock markets should benefit if OPEC and its partners agree to cut production when they meet this week, but demand will not fully recover until global economic activity increases.

LOOKING AHEAD - TALKING POINTS

Economic data

• Thursday- UK economic growth in February;
• Friday- Chinese inflation rate in March; US inflation rate in March.

1 https://www.dol.gov/ui/data.pdf

2 https://www.bls.gov/news.release/empsit.nr0.htm

Two weeks feels like a long time in markets still searching for answers about the social and economic impact of the coronavirus pandemic. On 23rd March we wrote a note entitled “There is a Path out of this”. We said Italy and other nations would be close to a peak in new case rates and this has proven to be true, even if the rate of decline has been slower than we expected. We also said this would afford markets the opportunity to rally and almost from that point stock markets have risen sharply. The key question is what happens next?

The good news is curtailing social interaction in so many countries simultaneously is having an impact on the spread of the virus, but the bad news is that it is also slowing economic activity. Over the short term, the price being paid in economic terms is eye-watering (without forgetting the human cost). Nearly 10 million Americans made a new claim for jobless benefits in the last two weeks, and the story is similar across most of the countries that have introduced some form of lockdown.

In this environment of little or no economic activity, some companies will fail, but many of those were already weak. Others will need to raise money to get them through this period, either by issuing bonds, taking advantage of existing lending facilities offered by banks or selling new shares. Dividends (payment made to shareholders out of company profits) are being cancelled to preserve cash, companies have stopped buying their own shares (which they tend to do when shares look cheap) and profits this year are rapidly declining in many sectors. However, at some point, the short-term disruption will lead to companies merging or purchasing competitors. Put simply, some companies will get too cheap and other businesses will opportunistically buy them. This should support share prices.

In markets there are always winners and losers, and the legacy of this episode will speed changes which were already going to happen. In retail, for example, even before the crisis, many businesses were suffering from the impact of online competition from the likes of Amazon, and the virus will only speed up the demise of a number household names. This can be contrasted with the extraordinary profits being earnt by food businesses such as Sainsbury’s and Tesco as they strive to keep up with the appetite of a captive audience of consumers. Airline and travel companies are obvious losers in this situation, and we think the impacts here will be far longer lasting than in other parts of the economy. Technology businesses in general will benefit as companies seek ways to improve productivity by replacing unreliable humans. The virus will cause changes in the workplace too. More people will work from home even after the movement restrictions end. There are obvious opportunities for cleaning companies, while those linked to health and wellbeing will receive a permanent boost.

Markets have rallied as new case rates started to peak in Europe, but we are far from out of the woods and the human toll will continue to rise for some time, albeit at a reducing rate. The support provided by central banks has stabilised the financial system, with measures easily surpassing the initial reaction to the global financial crisis of 2008. In the US alone, the Federal Reserve (the US central bank) is conducting as much quantitative easing (its bond-buying programme) every ten days as it undertook in 15 months between December 2008 and March 2010.

Government support has been targeted at preserving productive capacity. It probably will not be effective for everybody, but more should be on its way. Infrastructure projects, such as roads, other transport links and digital technology, seem likely areas of spending as the world tries to get back to normal. In the last few days, there have been reports of a possible $1.5 trillion package of measures in the US, and although the European Union is yet to agree a deal, the pressure is rising for some form of coordinated response. Also, the Bank of England recently announced it will directly fund some of the UK government’s extra spending. This “short-term” tactic, which effectively involves printing money to fund government spending, has been used before, but we expect it to be on a much bigger scale on this occasion. All these measures should accelerate the economic recovery.

As this crisis unfolds, there will be periods of bad news and good news. Relief that we could soon see an end to the widespread shutdown has been reflected in the markets, but in the weeks before that becomes a reality, investors will have to endure bad economic and corporate news. There is also the possibility that as people begin to move around and return to work, infection rates will pick up again. The experience of China shows the return to work is not necessarily automatic. While it is hard to estimate, China’s productivity is probably back to 75-85% of its capacity, but not to the same extent across all regions or sectors (as the charts below illustrate). Do not expect China to totally return to normal until the world recovers.

Markets: Slowing pandemic and US support measures boost shares

• Global shares rallied as the spread of the coronavirus appeared to slow and the Federal Reserve (US central bank) took further steps to support the US economy (see below).
• Omnis view: The markets are starting to look forward to an end of the worldwide shutdown. However, shares could fluctuate in the meantime as news emerges about economic growth and company profits, while the number of new cases may pick up again as people go back to work.

US: Fed announces new measures

• The Federal Reserve will provide an extra US$2.3 trillion of loans during the coronavirus crisis, extending its support to small businesses and local governments;
• Meanwhile, the number of claims for unemployment benefits jumped by over six million for the second week in a row, according to the Department of Labor[1].
• Omnis view: The markets will welcome the Federal Reserve’s announcement as it should help to protect jobs and businesses. There could be more good news for the US economy this week as politicians discuss further measures worth up to US$500 billion.

UK: Bank of England to fund government spending

• The Bank of England (BoE) announced that it would directly fund the government’s spending aimed at offsetting the impact of the coronavirus on the UK economy.
• Omnis view: The BoE has used this tactic before, but it should be on a much bigger scale on this occasion and it should accelerate the UK’s economic recovery.

Europe: Finance ministers agree on emergency measures

• European finance ministers agreed on an emergency package of measures worth €500 billion, including extra lending and unemployment insurance, to support the EU economy as it tries to reduce the impact of the coronavirus.
• Omnis view: A coordinated response from the EU is important because it will reassure the markets about the capacity of the region’s economy to recover.

Oil: OPEC and partners agree to cut output

• The Organization of the Petroleum Exporting Countries (OPEC) and its partners agreed on record cuts to production in an effort to support oil prices which have fallen as the coronavirus has weighed on global demand.
• Omnis view: Oil prices initially rallied after the agreement was announced, although they handed back some of those gains due to concerns that the cuts would not make up for the fall in demand.

LOOKING AHEAD - TALKING POINTS

Economic data

• Tuesday- Chinese imports, exports and balance of trade in March;
• Friday- Chinese economic growth in the first quarter of 2020.

1 https://www.dol.gov/ui/data.pdf

Markets: Mixed week for shares as oil prices fluctuate

• Global shares fell at the start of the week as oil prices dropped and reports emerged that an antiviral drug disappointed in clinical trials;
• However, the markets recovered as oil prices rebounded after US President Donald Trump stirred tensions in the Middle East and the US announced new measures to support its economy (see below).
• Omnis view: The markets are likely to remain sensitive to short-term developments as they wait for some clarity on when and to what extent countries will start to ease lockdown restrictions.

US: More government spending announced

• US politicians announced further measures worth nearly half a trillion dollars to help the country deal with the coronavirus pandemic, including fresh funding targeted at small companies;
• Meanwhile, over four million new Americans registered for unemployment benefits, according to the US Department of Labor[1].
• Omnis view: The markets welcomed the latest measures which should protect businesses and jobs, while the number of claims for unemployment benefits fell for the first time since US economic activity started slowing in mid-March.

Commodities: Middle East tensions boost oil price

• Oil prices plunged at the start of the week as lower demand due to the decline in economic activity led to concerns of oversupply and insufficient storage facilities;
• They recovered after President Trump told the US navy stationed in the Persian Gulf to react aggressively to provocation by Iranian forces.
• Omnis view: Tensions in the Middle East may disrupt supply, but not enough to make up of the loss of demand caused by the global lockdown. Oil prices should remain low until economic activity picks up again, although cuts to output due to come into effect in May should help.

UK: Signs emerge of economic impact of pandemic

• Spending by UK shoppers fell by a record 5.1% in March, according to the Office for National Statistics, after social distancing guidelines were introduced[2];
• An early estimate published by research firm IHS Markit showed UK business activity slowed to historic levels in April.
• Omnis view: These figures are early indicators of the impact of the coronavirus on the UK economy and will put pressure on the Prime Minister to outline the government’s strategy for easing restrictions and letting people return to work.

EU: Business activity hits record lows

• An early estimate also indicated business activity in Europe shrank in April to its lowest level since IHS Markit started measuring in 1998.
• Omnis view: The markets will closely monitor talks between EU leaders as they try to agree on measures which would help the region’s economy recover once lockdown ends.

Japan: Exports drop in March

• Japanese shares fell as figures released by the country’s Ministry of Finance showed exports (products produced in Japan but sold abroad) shrank by 11.7% in March compared with a year earlier[3].
• Omnis view: The Japanese government said it was allocating another8.9 trillion yen (£80 billion) to support the domestic economy, which would include handing cash straight to its citizens.

Corporate earnings: Netflix benefits from lockdown

• Shares in Netflix rose after the streaming service beat sales expectations in the first quarter thanks to a flood of new customers seeking to alleviate the boredom of being stuck at home.
• Omnis view: The outlook has worsened overall, with profits generated by US companies expected to drop by 15.8% in the first three months of the year compared to 14.8% the previous week[4].

LOOKING AHEAD - TALKING POINTS

Economic data

• Tuesday- Japanese unemployment rate in March;
• Wednesday- US economic growth in the first quarter;
• Thursday- EU unemployment rate in March, inflation rate in April and economic growth in the first quarter.

Monetary policy

• Wednesday- Federal Reserve interest rate decision;
• Thursday- European Central Bank interest rate decision.

Corporate earnings

• Several of the world’s biggest technology companies report first-quarter profits, including Facebook, Apple, Amazon, and Google’s parent Alphabet.

1 https://www.dol.gov/ui/data.pdf

2 https://www.ons.gov.uk/businessindustryandtrade/retailindustry/bulletins/retailsales/march2020

3 https://www.customs.go.jp/toukei/shinbun/trade-st_e/2020/2020034e.pdf

4 https://insight.factset.com/sp-500-earnings-season-update-april-24-2020

Markets: Easing of lockdown and promising drug trials boost shares

• Global shares finished higher despite disappointing results from companies reporting first-quarter profits and concerns about the impact of the coronavirus on the world economy (see below);
• The markets put a greater emphasis on the easing of some social distancing measures in Europe and reports of a promising trial of a treatment for the virus.
• Omnis view: As the rate of new cases appeared to stabilise in many countries, the markets are starting to look ahead to when business activity picks up again, as we are currently witnessing in China. The unprecedented steps taken by governments and central banks in response to the crisis should accelerate the recovery.

China: Sharp fall in economic activity

• Figures released by China’s National Bureau of Statistics showed the toll that the coronavirus took on the country’s economy in the first quarter of the year as it shrank by 6.8%[1].
• Omnis view: Focus will now turn to how the Chinese economy performs for the rest of the year and what steps the government will take to support the recovery. The country’s central bank took pre-emptive action by cutting interest rates before the slowdown in the first quarter was announced, and it may launch additional measures when it meets this week.

US: Early signs of virus weighing on economy

• There was further evidence of the impact of the coronavirus on the US economy as another five million Americans applied for unemployment benefits[2], while industrial activity and retail sales slowed to record lows in March.
• Omnis view: It is too early to assess the full economic impact of the virus outbreak as the US went into lockdown later than other countries. However, these figures do not bode well for the short-term outlook, particularly the rise in unemployment.

Corporate earnings: Profits tumble at US banks

• Earnings season got off to a disappointing start as profits dropped in the first quarter of the year at some of America’s biggest banks, including JP Morgan, Wells Fargo, and Morgan Stanley.
• Omnis view: US banks typically set the tone for earnings season, although expectations were already low as the coronavirus brought many economies to an effective halt. Overall, earnings among US companies are expected to fall by 14.5% in the first quarter, according to research firm FactSet[3].

Commodities: Oil prices drop as demand recedes

• Oil prices fell as concerns about the decline in demand due to the coronavirus crisis overshadowed the cuts to production agreed by the Organization of the Petroleum Exporting Countries (OPEC) and its partners.
• Omnis view: Oil prices should remain low until the global economy starts to recover, which will weigh on energy-heavy stock markets like the FTSE 100. Increasing industrial activity in China may provide some support.

LOOKING AHEAD - TALKING POINTS

Economic data

• Tuesday- UK unemployment rate in February;
• Wednesday- UK inflation rate in March;
• Friday- Japanese inflation rate in March.

Brexit

• The latest round of negotiations between the UK and the EU start on Monday, with the UK insisting that there will be no extension to the transition period.

Corporate earnings

• Netflix is the first of the major technology firms to report profits as earnings season continues.

1 http://www.stats.gov.cn/english/PressRelease/202004/t20200417_1739339.html

2 https://www.dol.gov/ui/data.pdf

3 https://insight.factset.com/sp-500-earnings-season-update-april-17-2020

Markets: Mixed week for shares as economies plan to restart

• Global shares rose early in the week as several European countries outlined plans for an easing of lockdown restrictions and biotech firm Gilead announced positive results from its latest tests of a potential coronavirus treatment;
• However, they handed back some of those gains as the markets recognised the return to work would be gradual and the threat of trade tensions resurfaced as US President Donald Trump blamed China for the spread of the virus.
• Omnis view: Markets welcomed the easing of restrictions as economic activity should start picking up again. Whether countries experience a second wave of infections in the coming weeks will have a bearing on the trajectory of shares.

Global: Economies shrink at record rates

• The US economy contracted by 4.8% in the first quarter compared to a year earlier, its fastest pace since 2008)[1], while nearly four million new Americans applied for unemployment benefits[2];
• The EU economy also experienced its worst performance in the first quarter since 2008, shrinking by 3.3% on an annual basis[3].
• Omnis view: The drop in economic growth was widely expected, but worse could be to come in the second quarter. Western economies only started slowing down in March, but activity effectively came to a halt in April.

Central banks: Interest rates remain at record lows

• The Federal Reserve (US central bank), the European Central Bank (ECB) and the Bank of Japan (BoJ) decided to leave interest rates unchanged after meeting last week;
• The ECB took steps to encourage the region’s banks to keep lending money, while the BoJ announced it would increase its programme of buying bonds- known as quantitative easing- and expand it to company bonds.
• Omnis view: All three central banks warned about the economic impact of the coronavirus pandemic but said they were ready to take further measures if necessary to support the recovery.

Corporate earnings: Amazon and Apple uncertainty weighs on markets

• Shares in Facebook and Alphabet (parent company of Google) rose after both companies reported sales had stabilised in April following a challenging end to first quarter caused by the coronavirus pandemic;
• Amazon shares fell as the e-commerce giant warned that rising costs could offset its surge in profits during the lockdown;
• Apple beat sales expectations but the iPhone maker’s shares dropped as it could not provide guidance for profits in the second quarter.
• Omnis view: The uncertain outlook for Amazon and Apple weighed on the US markets as they are two of the biggest listed companies. Overall, profits generated by US companies in the first quarter are expected to drop by 13.7%, an improvement on the previous week’s forecast of 15.8%[4].

Commodities: Prospect of return to work boosts oil prices

• Oil prices fell at the start of the week and then fluctuated as concerns of oversupply and a lack of storage facilities lingered;
• However, they recovered as European governments outlined plans to restart their economies.
• Omnis view: A subsequent rise in demand for oil will boost prices and have a positive knock-on effect on energy-heavy stock markets like the FTSE 100.

LOOKING AHEAD - TALKING POINTS

Economic data

• Tuesday- US imports, exports and balance of trade in March;
• Thursday- Chinese imports, exports and balance of trade in April;
• Friday- US non-farm payrolls (job creation) in April.

Monetary policy

• Thursday- Bank of England interest rate decision.

1 https://www.bea.gov/news/2020/gross-domestic-product-1st-quarter-2020-advance-estimate

2 https://www.dol.gov/ui/data.pdf

3 https://ec.europa.eu/eurostat/documents/2995521/10294708/2-30042020-BP-EN.pdf/526405c5-289c-30f5-068a-d907b7d663e6

4 https://insight.factset.com/sp-500-earnings-season-update-may-1-2020

Markets: Return to work lifts shares

• Global shares ended the week higher, overcoming lingering concerns about tensions between the US and China and evidence of the toll that the coronavirus pandemic has taken on the global economy (see UK and US sections below);
• The markets rallied as US states and European countries eased lockdown restrictions and the prospect of a subsequent rise in demand boosted oil prices.
• Omnis view: The markets appear to be focusing on the economic recovery which they hope will be reinforced by unprecedented support from governments and central banks. However, reports of new outbreaks in China, South Korea and Germany as they attempt to restart activity may give pause for thought.

UK: Bank of England optimistic about recovery in 2021

• The Bank of England (BoE) kept interest rates at their current level and warned the UK economy could shrink by as much as 14% in 2020[1];
• Figures released by IHS Markit showed UK business activity fell to its lowest level on record in April;
• Meanwhile, the pound weakened against the US dollar amid uncertainty about whether the government would extend the Brexit deadline past the end of this year.
• Omnis view: The BoE was more optimistic about the outlook for the UK economy which it claimed could rebound by 15% in 2021. Governor Andrew Bailey also pledged to introduce further support measures if needed.

US: Coronavirus weighs on job market

• The slowdown in US economic activity due to the coronavirus pandemic led to the loss of more than 20 million jobs in April, according to the latest non-farm payroll report[2];
• Despite tensions with China over the source of the virus, talks continued between the two sides about the implementation of the first phase of the trade deal signed in January.
• Omnis view: The rise in unemployment could prolong the recovery, putting pressure on politicians to take additional steps to support the economy. However, they are struggling to agree on the terms of a new package of measures.

Europe: Germany challenges role of QE

• The euro weakened against the US dollar after a German court questioned the use of the European Central Bank’s (ECB) bond-buying programme, known as quantitative easing (QE).
• Omnis view: QE is a key tool employed by the ECB to keep the income paid on bonds (yields) low and support the financial system, so divisions among member states about its use weighed on the euro. The ECB must respond to the German court within three months.

China: Exports increase in April

• Chinese exports (goods produced in China but sold abroad) rose by 8.2% in April according to the country’s customs agency[3].
• Omnis view: An increase in exports is further evidence that Chinese economic activity is picking up again, although demand from Europe and the US may take longer to recover.

LOOKING AHEAD - TALKING POINTS

Economic data

• Tuesday- Chinese inflation rate in April; US inflation rate in April;
• Wednesday- UK economic growth in the first quarter;
• Friday- Chinese unemployment rate in April.

1 https://www.bankofengland.co.uk/-/media/boe/files/monetary-policy-report/2020/may/monetary-policy-report-may-2020

2 https://www.bls.gov/news.release/empsit.nr0.htm

3 http://english.customs.gov.cn/Statics/cf5c30c4-704d-4a15-8040-06730301bb1a.html

Markets: Uncertainty weighs on shares

• Global shares fell at the start of the week after new coronavirus cases were reported in the Chinese city of Wuhan (where the virus originated) and the South Korean capital of Seoul;
• The markets also had to contend with rising tensions between the US and China, as President Trump continued to blame China for the pandemic. (see Global section below)
• Omnis view: Any indication of a second wave of virus cases in the first countries to ease lockdown restrictions will rattle the markets as the restart of business activity is critical to the economic recovery. The markets are likely to remain sensitive to hurdles that arise as we gradually return to normality.

UK: Growth contracts at record level in March

• The UK economy shrank by 5.8% in March, the biggest drop since the Office for National Statistics started measuring monthly growth figures in 1997[1];
• The pound weakened against the US dollar as Brexit negotiations stalled over EU demands that the UK apply similar regulatory standards in areas including employment and the environment.
• Omnis view: The fall in growth was widely expected so it had a limited impact on UK shares. As with the US and European figures reported recently, worse could be to come in the second quarter as the country spent most of April in lockdown. Meanwhile, with the deadline for requesting an extension at the end of June fast approaching, the state of Brexit negotiations adds further uncertainty to the UK economic outlook.

US: Economy may need more support, says Fed Chair

• There was more bad news for the markets when Jay Powell, the Chair of the Federal Reserve (US central bank), warned about the potential damage the pandemic has caused to the US economy;
• Mr Powell claimed the government and the central bank might have to introduce new measures to support the domestic economy;
• Further evidence of the economic toll taken by the virus emerged as spending by US shoppers dropped by 16.4% in April[2].
• Omnis view: While the Fed still has room to manoeuvre, it is likely that additional measures will also be required from the government. Talks continue about plans to increase spending, although the Republican party is unlikely to agree to a $3 trillion package proposed by the Democrats.

Global: Trump stokes tensions with China

• US President Donald Trump ordered a pension fund managing money on behalf of state employees to stop investing in Chinese companies which the White House claims pose a risk to national security;
• President Trump also threatened to ‘cut off the whole relationship’ with China and limit access to American suppliers for Chinese technology firm Huawei.
• Omnis view: The last thing the markets need at the moment is uncertainty caused by tensions between the world’s biggest economies. However, with President Trump facing accusations of mishandling the coronavirus crisis and a presidential election later in the year, whether he tempers his rhetoric remains to be seen.

Oil: Producers announce additional cuts

• Oil prices rose after Saudi Arabia, the United Arab Emirates and Kuwait pledged to cut production in June to make up for the drop in demand caused by the coronavirus pandemic.
• The International Energy Agency provided more support for oil prices by predicting supply would fall to its lowest level in nine years in May [3].
• Omnis view: Production cuts and an increase in demand as global economic activity picks up again should boost oil prices and subsequently energy-heavy markets like the FTSE 100.

LOOKING AHEAD - TALKING POINTS

Economic data

• Monday- Japanese economic growth in the first quarter;
• Tuesday- UK unemployment in March;
• Wednesday- UK inflation rate (the rate at which prices rise) in April;
• Friday- Japanese inflation rate in April.

1 https://www.ons.gov.uk/economy/grossdomesticproductgdp/bulletins/gdpfirstquarterlyestimateuk/januarytomarch2020

2 https://www.census.gov/retail/marts/www/marts_current.pdf

3 https://www.iea.org/reports/oil-market-report-may-2020

Markets: Optimism over potential vaccine boosts shares

• Global shares ended the week higher as US biotech firm Moderna announced positive results from a trial for its vaccine, and European countries continued to ease lockdown restrictions without experiencing a substantial rise in new coronavirus cases;
• Tensions between the US and China weighed on the markets though, as US President Donald Trump accused China of spreading disinformation about the pandemic, and reports indicated that China plans to impose a national security law on Hong Kong.
• Omnis view: For now, good news about the world’s gradual return to normality seems to be eclipsing concerns over the relationship between the US and China, which would have rattled the markets before the pandemic. However, government bonds, traditionally considered safe haven assets at times of turbulence, also rose last week, reflecting a degree of uncertainty among investors.

UK: Tentative signs of economic recovery

• Early estimates published by research firm IHS Markit showed business activity in the UK picked up in May after hitting record lows in April;
• Bank of England governor Andrew Bailey said negative interest rates are one of the tools under consideration to support the UK’s recovery.
• Omnis view: While an increase in business activity is grounds for optimism, it remains well below pre-crisis levels. How long activity takes to fully recover and have a material impact on economic growth depends on the speed and success of the government’s plans to ease lockdown restrictions.

Brexit: Tensions linger as talks continue

• Tensions remained elevated as the UK and Europe clashed over the contentious issue of the Northern Irish border and the level of access UK businesses will get to the European market after Brexit.
• Omnis view: As the coronavirus crisis gradually fades, focus is increasingly turning to the fast-approaching deadline next month when the two sides must decide if they can finalise a free trade agreement by the end of the year. The pound’s reaction against the US dollar was relatively muted, although it may fluctuate if the likelihood of a hard Brexit increases.

Europe: Coordinated economic response proposed

• Germany and France called on EU members to agree on a package of measures worth €500 billion to support the region’s economic recovery as it emerges from lockdown;
• Business activity also rose in the EU in May, although it still has some way to go to reach the level it was at before the pandemic.
• Omnis view: The EU has been slow to agree a coordinated response, so the markets should welcome two of the region’s biggest economies arguing in favour of a sizeable support package. However, all 27 member states must approve it, and several countries oppose issuing grants instead of loans. Talks continue this week.

LOOKING AHEAD - TALKING POINTS

Economic data

• Friday- Japanese unemployment rate in April; EU inflation rate in May.

Markets - Tensions between US and China linger

• Global shares rose as the easing of lockdown restrictions continued around the world and details of further economic support measures emerged in the EU and Japan (see below).

• Tensions between the US and China hovered over the markets, as the Chinese government approved a national security law which infringes on Hong Kong’s independence.

• US President Donald Trump responded by revoking a special trade arrangement between the US and Hong Kong, but the markets ended the week strongly as he was expected to take a more aggressive stance.

• Omnis view: A further deterioration in relations between the US and China could lead to a return of trade tensions which caused so much uncertainty over the last two years. With a presidential election looming and President Trump struggling with domestic issues, this issue is unlikely to fade. Meanwhile, the risk remains of a second wave of coronavirus infections as economies restart. However, the unprecedented measures put in place by governments and central banks should continue to support the markets.

Europe: EC proposes substantial recovery package

• The euro strengthened against the US dollar as the European Commission (EC) proposed a package of measures worth €750 billion to help the economies of EU members recover from the coronavirus crisis.

• The European Central Bank emphasised the urgency of a coordinated response when it announced that the EU economy could shrink by as much as 12% this year.

• Omnis view: The EC’s proposal includes €500 billion of grants which France and Germany support, but several countries in northern Europe oppose, so securing an agreement from all 27 member states could prove challenging. If successful, the package represents a significant step towards a more unified approach to EU policy.

Japan: Government lifts state of emergency

• Japanese shares rose as Prime Minister Shinzo Abe lifted the state of emergency put in place seven weeks ago to contain the spread of the coronavirus.

• There was further good news for the Japanese markets when the country’s government announced another round of economic support measures worth 117 trillion yen (roughly £860 billion) to offset the impact of lockdown.

• Omnis view: The markets welcomed the easing of lockdown restrictions which will accelerate the recovery of the Japanese economy, while the scale of the latest support package should also provide a major boost.

LOOKING AHEAD - TALKING POINTS

Economic data

• Wednesday- EU unemployment rate in April;
• Friday- US non-farm payroll report (job creation) in May.

Monetary policy

• Thursday- European Central Bank interest rate decision.

Brexit

• Talks between the UK and EU resume as the deadline to agree an extension to the transition period fast approaches.

Both UK and European governments have, in recent weeks, been rightly focused on containing the coronavirus and mitigating its economic impact. However, this has necessarily detracted from negotiations over the UK’s withdrawal from the EU. Lest we forget, the UK has until the end of June to request an extension to the negotiation period, without which the transition arrangements will cease on 31st December 2020.

The proximity of these deadlines, together with the prioritisation of the Covid-19 response and the government’s refusal to countenance any delay to the process, raise the chances that the negotiations will fail. This, in turn, increases the chances that the UK’s departure from its current trading arrangements will ultimately be ‘hard’.

Financial markets – which have long viewed a hard Brexit as negative for UK assets – have certainly been alive to this possibility. Though the FTSE All Share index of UK stocks has made firm gains in recent weeks, it has lagged other international indices. The pound has also weakened over this period, exacerbating the underperformance for sterling-based investors.

Under the tutelage of special advisor Dominic Cummings, the negotiating approach of the Johnson government appears to be one of brinksmanship. Without commenting on its political implications, from an investor’s perspective this approach widens the range of possible outcomes, adding to the uncertainty that has unsettled the UK’s financial markets throughout the Brexit process.

As the 30th June extension deadline approaches, we will be watching closely for signs of the government’s intent.

US PRESIDENTIAL ELECTIONS

The US heads to the polls in November. At this stage in a presidential election year, the main party candidates would normally be deep into the campaign trail, wearing out the shoe leather and setting out their strategies to win over key swing states. Needless to say, lockdown measures have largely called a halt to normal proceedings.

This year’s election is arguably unlike any other. At this stage it is even unclear how votes will even be cast, with Donald Trump campaigning furiously against an extension of postal voting rights. The outcome is exceptionally hard to predict. The president’s approval ratings have slumped as the coronavirus crisis has escalated, and a recession in election year has historically pointed to defeat for the incumbent. Against this, Joe Biden is widely viewed as a relatively weak Democratic candidate and, come November, the US economy may well be recovering from the recession.

While the outcome of the election remains uncertain, we can have a little more insight into the near-term implications for policy. Firstly, both Democrats (in control of the House of Representatives) and Republicans (in control of the Senate) will be determined to cast themselves as saviours of the US economy. This may well lead to additional government spending, though the negotiations are likely to be characterised by unseemly efforts to ensure the ‘right’ party receives the credit. Meanwhile, Donald Trump will likely continue to stoke tensions with China in pursuit of his ‘America first’ agenda.

TRADE WARS

Economically, the reignition of hostility between the US and China comes at an awkward time, to say the least. Throughout 2019, financial markets made clear that the consensus views trade wars as damaging to the global economy. Given the severity of the recession prompted by measures to contain the coronavirus, wilfully inflicting further damage on the economy seems akin to rubbing salt into a very deep wound.

China’s recent decision to impose new security laws on Hong Kong have increased the stakes. The US has responded by declaring Hong Kong no longer autonomous and threatened the removal of its special trading status. Ross Teverson, manager of the Omnis Global Emerging Market Equity Opportunities fund, summarises the implications as follows:

“These tensions come at a time when the Hong Kong economy is going through a second year of recession, and a wholesale revoking of Hong Kong’s special trading permissions would be very negative for the domestic Hong Kong economy, particularly the property market. In making any major changes to Hong Kong’s status, the US would be penalising a Hong Kong population that is largely pro-US and would be damaging US interests in Hong Kong (including the disruption of numerous US companies with their Asian headquarters there). It would also risk accelerating Hong Kong’s integration into China, so it is hard to see the logic in the US doing so.

Our base case is that the rhetoric will be more aggressive than any actual action the US takes. A more likely scenario would appear to be headline generating measures targeting specific individuals or companies. Having said this, we cannot ignore the risk that something more disruptive happens, given the number of China hawks in the Trump administration and the upcoming election.”

The Hong Kong stock market initially responded with its sharpest one-day fall in five years on Friday last week (22nd May). Though the benchmark Hang Seng index subsequently ended this week broadly unchanged, we remain alert to the implications for Hong Kong, and for the Asia Pacific region as a whole.

GLOBAL SUPPLY CHAINS

Whereas the impetus for ‘de-globalisation’ had previously been viewed as largely political, the Covid-19 pandemic has introduced an economic rationale for shortening global supply chains. International business models, with components delivered ‘just in time’ from a variety of international locations, are extremely cost effective as each component can be procured from the cheapest available source.

However, as recent events have made clear, while efficient, these models are also fragile: a single break in the chain can threaten the entire production line. It is possible that companies will respond by prioritising the robustness of their supply chains over their cost. If so, it is reasonable to expect higher production costs to be passed on to consumers through higher prices. In other words, shortening global supply chains may lead to higher inflation.

DEBT

Around the world, policy makers have sought to mitigate the economic impact of efforts to contain the pandemic through a huge increase in government spending. This spending must be funded. Consequently, an enormous amount of government debt has already been issued, with much more still required – as much as $17 trillion according to the OECD. Though governments have – arguably justifiably – done ‘whatever it takes’ to limit the already significant damage caused by the pandemic, thoughts are inevitably turning to how the debt will be paid off.

A traditional approach would see governments rein in spending and increase taxes for many years to come. However, the aftermath of the financial crisis has raised serious questions about the efficacy of austerity as a policy to tackle excess government debt. Reduced spending and higher taxes are a headwind for economic growth. If these headwinds are too strong, the economy stalls and debt levels as a proportion of economic output can actually rise instead of fall.

Though higher taxes are perhaps inevitable, we believe policymakers will consider less orthodox ways of reducing the burden of debt. Firstly, central banks may well continue to buy up huge swathes of the government bond market. This should prevent interest rates rising, making it more affordable for governments to service the debt. Secondly, central banks could be persuaded to exchange their holdings of traditional government debt for permanent, non-interest-bearing notes. Though somewhat technical, this measure would effectively see central banks forgive governments their debt while avoiding an official default.

As per the experience of the 2008 financial crisis, unorthodox policy measures may well prompt much hand wringing, not least over their inflationary implications. However, a degree of inflation is in no ways undesirable, assuming it is controlled.

INFLATION

Inflation is a powerful force and serves as an effective lubricant to economic growth. If consumers expect prices to rise, they will make purchases now rather than later, stimulating demand and supporting economic growth. It also tilts the balance between borrowers and lenders: inflation erodes the value of anything with a fixed price, including debt. With debt levels at elevated levels around the world, and with much of it owed to central banks, there is a compelling argument to allow somewhat elevated inflation to effectively reduce the value – and therefore the burden – of this debt.

The debt-fighting nature of inflation may incentivise policy makers to abandon austerity and pursue more radical ideas to reduce the debt pile. It may also encourage central banks to maintain lower interest rates than they ordinarily might.

SAVINGS & CONSUMPTION

In theory, low interest rates and high inflation should encourage individuals to spend rather than save. However, the experience of some European nations over the past few years suggests this theory may have its limits. With low interest rates reducing income on savings, many individuals have responded by saving more, not less. With this in mind, it is interesting to see that savings levels have increased markedly through the lockdown period in many countries including the UK, Spain, Italy and the US.

It is possible that increased savings reflect the dearth of spending opportunities that have been available in lockdown. They may also indicate that government policies to support workers’ incomes through the recession have been successful. However, if savings are being increased against the threat of job losses once these policies end, or if the pandemic has simply made people more risk averse, they may forewarn of a slow economic recovery and persistently low inflation.

OUR CONCLUSION

Though the human and short-term economic impacts of the coronavirus pandemic have understandably been dominating the headlines, there are myriad other issues for investors to get to grips with. Many are related to the pandemic and the efforts to limit its spread. Some will come to a crux in the next few months, others may take many years to unfold. All are likely to have a material impact on financial markets and the returns investors might expect from them.

As the world continues to feel its way out of lockdown, and as it grapples with each of the issues mentioned above – and doubtless with many others – we will endeavour to keep you abreast of developments and how they may impact your investment portfolios

Last Week - Key Takeaways

Markets: Brighter outlook drives shares

• Optimism about the global economic recovery following the coronavirus pandemic helped to drive shares higher, as US employment unexpectedly rose in May and the European Central Bank announced new support measures.

• There was further good news for the markets as countries continued to ease lockdown rules, although tensions lingered between the US and China as they argued over passenger flight restrictions.

• Omnis view: The disconnect between rising markets and weak underlying economies seemed to narrow last week as steps taken by governments and central banks to offset the impact of the pandemic started to have the desired effect. If economic activity continues to pick up without causing a surge in new virus cases, then the outlook should remain positive.

US: Companies start rehiring in May

• US companies caught the markets by surprise by adding two and a half million jobs in May, according to the non-farm payroll report, while the unemployment rate fell to 13.3%.

• Omnis view: The unemployment rate remains high, but it bodes well for the country’s economic recovery that companies have started hiring again earlier than expected, thanks to the unprecedented measures launched by US politicians and the Federal Reserve (US central bank).

Europe: ECB launches new measures

• The euro strengthened against the US dollar after the European Central Bank (ECB) kept interest rates at record lows and expanded its bond-buying programme by €600 billion to help the region’s economy recover from lockdown.

• Omnis view: The ECB also forecast the EU economy would shrink by 8.7% this year, putting further pressure on member states to agree on a package of economic support measures worth €750 billion proposed by the European Commission. However, coming to a consensus on the terms is proving difficult.

UK: Brexit talks end in deadlock

• The latest round of Brexit negotiations ended in another stalemate, as the UK and the EU failed to agree on key issues including business regulations and fishing rights.

• However, both sides hinted that they were prepared to make concessions, with the UK willing to accept some trade tariffs (taxes on goods imported from abroad) and the EU showing flexibility over state aid rules.

• Omnis view: Unless the UK and EU agree to extend the transition period past 31^st December before the end of June, Brexit uncertainty will return as the likelihood of the UK leaving the EU without a free trade agreement will increase again.

LOOKING AHEAD - TALKING POINTS

Economic data

• Wednesday - Chinese inflation rate in May;

• Friday - UK economic growth in April.

Monetary policy

• Wednesday - Federal Reserve interest rate decision.

Markets: Shares fall as optimism fades

• US shares started the week strongly, especially the technology-heavy NASDAQ index, amid optimism about the restart of business activity following the coronavirus-enforced lockdown.

• However, global shares ended the week lower after the Federal Reserve (US central bank) predicted the country’s economic recovery would be slow and new cases of the virus emerged in parts of the US and China that were among the earliest to ease lockdown restrictions.

• Omnis view: Global authorities face the unenviable challenge of finding the right balance between restarting their economies without causing a new wave of infections. The markets will closely monitor their progress over the coming weeks and months, and any sign they are moving too fast could cause further fluctuations.

UK: Economy shrinks by 20% in April

• Figures released by the Office for National Statistics showed the UK economy shrunk by 20.4% in April compared to the previous month.

• Omnis view: The drop in economic growth may be the sharpest on record, but it was widely expected as the country spent the month in lockdown. However, business activity started picking up in May, so April’s figure should represent the trough.

US: Fed keeps interest rates at record lows

• The Federal Reserve decided against changing interest rates at its latest meeting and suggested they may remain at the current level until 2022 to offset the damage caused by the pandemic.

• The Fed also forecast that the US economy would shrink by 6.5% this year before recovering by 5% in 2021.

• Omnis view: While the Fed’s gloomy outlook weighed on shares, it pledged to continue using all the tools at its disposal to support the domestic economy, which have helped the markets rally since plunging in March.

Brexit: EU offers concession

• The EU’s chief negotiator Michel Barnier said he was prepared to make concessions on how business regulations are enforced after Brexit, one of the most contentious issues facing the UK and EU during the latest round of negotiations.

• Omnis view: With the global economy still recovering from lockdown, the last thing UK markets need is further Brexit uncertainty, so any signs that the two sides could come to an agreement will be welcome.

LOOKING AHEAD - TALKING POINTS

Economic data

• Tuesday- UK unemployment rate in April

• Wednesday- UK inflation rate (the rate at which prices rise) in May

• Friday- Japanese inflation rate in May

Monetary policy

• Tuesday- Bank of Japan interest rate decision

• Thursday- Bank of England interest rate decision

LAST WEEK - KEY TAKEAWAYS

Markets: US infections overshadow UK and EU recovery

• Global shares fell after a spike in the number of coronavirus infections in several of the US states that were among the earliest to ease social distancing rules, leading other states to announce new restrictions.

• The return of trade tensions between the US and the EU also weighed on the markets, although there was some good news as business activity picked up in the UK and EU in June.

• Omnis view: Shares remain sensitive to the latest developments, rising in response to signs of economic recovery but falling when new cases emerge which could slow activity again. This pattern is likely to continue until a vaccine or cure materialises. In the meantime, measures introduced by governments and central banks should support the markets.

Global economy: Business activity picks up

• Business activity recovered faster than predicted in June in the UK and EU and edged closer to the level at which it should start expanding again.

• Omnis view: The improvement in activity bodes well for both economies and suggests the recovery may be quicker than expected. Whether it continues on this trajectory depends on the UK and EU’s ability to contain localised breakouts of the virus.

Trade: Tensions loom between US and EU

• The US threatened to impose tariffs (taxes on goods imported from abroad) on $3.1 billion of European products in response to what the World Trade Organisation deemed illegal support for the aircraft industry from the EU.

• Omnis view: The prospect of trade tensions with the US will cause concern for a regional economy which relies heavily on exports (goods produced locally but sold abroad) and is showing signs of recovering from the pandemic.

US: Jobless claims fall again

• The number of people applying for unemployment benefits for the first time continued to fall to 1.48 million, down from 1.54 million the previous week and nearly seven million at the height of the crisis in March.

• Omnis view: Although at a slower pace than expected, the drop in jobless claims is a positive sign for the US economy as it indicates that activity is picking up again. However, the tightening of lockdown restrictions following the breakout of new infections in several states could slow the recovery.

Brexit: EU hints at compromise

• Michel Barnier, the EU’s chief Brexit negotiator, said he was willing to compromise with the UK on business regulations, one of the key issues holding up negotiations on a free trade deal, but he insisted the UK must reveal its policies for when it leaves the EU.

• Omnis view: With the deadline about to pass for the UK to request an extension to the transition period, both sides are under pressure to make progress towards an agreement, starting with the latest round of talks which begin today. With the prospect of a hard Brexit back on the table, uncertainty may return to unsettle the markets.

LOOKING AHEAD - TALKING POINTS

Economic data

• Tuesday- Japanese unemployment rate in May.

• Thursday- EU unemployment rate in May; US non-farm payrolls (job creation) in June.

Markets: Improving outlook boosts shares

• Global stock markets ended the week higher having chosen to focus on the economic recovery from the coronavirus crisis rather than lockdown restrictions returning in several countries.

• Although new cases emerged in the US, the UK and elsewhere, there were encouraging signs from the US and Chinese economies (see below), while reports of further progress towards developing a vaccine also improved the outlook.

• Omnis view: In the second quarter, shares recorded the strongest period of growth in over 20 years, as the unprecedented measures introduced by governments and central banks helped them rebound from the correction in February and March. New infections could slow the recovery, but additional steps are expected to be announced shortly, which should continue to support the markets.

US: Employment recovery continues

• The US economy created 4.8 million jobs in June, including 2.1 million in the leisure and hospitality industries, and the unemployment rate fell to 11.1%.

• Omnis view: These figures suggest that the US economy may rebound quickly (frequently referred to as a V-shaped recovery), but the potential slowdown in activity due to the wave of new infections in several states could reverse some of the progress.

Asia: Business activity climbs in June

• Activity in China’s services sector, which includes some of the companies hit hardest by social distancing rules such as restaurants and hotels, rose sharply in June.

• Omnis view: China was among the first countries to lockdown its economy to contain the spread of the coronavirus, and the markets have been closely monitoring its easing of restrictions. While new cases have emerged, the increase in business activity is encouraging for the rest of the world.

Europe: Job losses slow in May

• There was good news for the European job market too as the unemployment rate came in lower than predicted in May at 6.7%.

• Omnis view: The slowdown in job losses is a positive sign for the EU’s economy, although many countries still have workers on furlough schemes so the full extent of the pandemic’s impact on employment will not be known until they go back to work.

Brexit: Latest talks end in stalemate

• The latest round of Brexit negotiations concluded without any breakthroughs, although the EU hinted it was willing to make concessions about the contentious issue of the role of the European Court of Justice after the UK leaves the EU.

• Omnis view: As things stand, Brexit uncertainty seems likely to linger for the foreseeable future. The Prime Minister has set an unofficial deadline of the end of this month for progress, while the EU claims the two sides need to finalise a deal by October to give member states enough time to approve it. Talks continue this week.

LOOKING AHEAD - TALKING POINTS

Economic data

• Thursday- Chinese inflation (the rate at which prices rise) in June.

Summer statement

• Chancellor Rishi Sunak announces his latest plans to help the UK economy recover from the coronavirus crisis on Wednesday.