UK Weekly Commentary

BlackRock |04-Mar-2019


UK weekly commentary from BlackRock covering week highlights, what we’re thinking about the markets and what your clients may be asking this week.

Week past - highlights Week ahead – highlights


Taking the pulse of Brexit

We asked: What is the most likely outcome for Brexit?

As the Labour party is forced to back a second referendum and the government offers a vote on no deal or a delay, you see support for the Prime Minister’s deal increasing, with the likelihood a second referendum and a no deal at near-level pegging.

UK Weekly Voting Report

Rupert Harrison, Chief Macro-Strategist: “As a market participant you should now be thinking of some kind of delay beyond the end of March as your central case. The key question is how long is that delay. The minimum would be three months through to May, forcing mechanism for the UK to decide on the kind of Brexit it wants. Or there is this idea floating around in Brussels of a 21 month delay. That’s quite painful for pro-Brexit politicians in the UK. Theresa May is quite happy to have this delay as a threat because she needs pressure on her pro-Brexit wing.”

What we think

Scott Thiel, Chief Fixed Income Strategist, BlackRock Investment Institute on why the outlook for bonds is improving

“Bonds are making a comeback. We see them as a viable source of income amid higher US interest rates, a slowing but growing US economy and a pause in the Federal Reserve’s tightening cycle. We also like government bonds as portfolio shock absorbers as the risk of late-cycle volatility in the equity market grows.

“A Fed on hold gives comfort to investors looking to move out of cash and money market funds in search of greater income – via longer-duration bonds and credit. Negative bond/equity correlations have returned and are likely here to stay, offering a powerful diversification tool in balancing risk and reward in portfolios.

“We expect the Fed to avoid raising rates until the second half, after it pledged a more patient and data-dependent stance on policy. Is this a pause or peak of the Fed’s tightening cycle? It depends on economic data in coming months, in particular inflation readings. We expect the European Central Bank to stay put on rates this year, and see its forward guidance as a focus for markets.

“We see US growth slowing as the economic cycle moves into the late stage. Ongoing monetary policy support is vital to Europe’s economy, we believe, while fiscal stimulus provides some cushion. We see China’s economy regaining its footing in the first half on policy easing, putting a floor under the synchronised slowdown in emerging market growth. We see inflation below target in Europe and Japan, while price pressures in the US look contained.”

Week past

It was a momentous week in UK politics: there were breakaway groups from the Labour and Conservative parties as the ‘Independence’ Group was born. The major parties reacted by moderating their Brexit stance – Labour by supporting a second referendum and the Conservatives by agreeing to votes on a ‘no deal’ and a delay to Article 50. The pound rallied in response as the risk of a cliff edge Brexit dissipated.1

French, German, Eurozone services and manufacturing purchasing managers’ index (PMI): hit hard by weak global demand and political uncertainty, Eurozone PMI for manufacturing hit their lowest level for almost six years in February. Output is now contracting for the first time since 2013, stoking fears of a recession in the region.2

Eurozone inflation: as expected consumer prices index (CPI) fell to 1.4% from 1.6% in January year on year. December’s reading had been the weakest in eight months. Energy prices are pushing numbers lower. Core inflation rose slightly.3

US services and manufacturing PMI: US manufacturing output has been pushed lower by significant drops in motor vehicle production and this month saw manufacturing PMIs drop to their lowest level in 17 months.4

President Donald Trump has said that the US and China are "very very close" to signing a trade agreement, adding that both nations "are going to have a signing summit". Markets would breathe a sigh of relief should the two sides end the lengthy dispute.5

1 Theresa May poised to open the way for delaying Brexit, Financial Times, February 2019
2 Eurozone manufacturing slips into contraction — survey, Financial Times, February 2019
3 Eurozone inflation falls in January as energy prices continue to drop, CityAm, February 2019
4 US manufacturing PMI slumps to 17-month low, while services gauge picks up, MarketWatch, February 2019
5 Trump: US and China 'very very close' on deal, BBC, February 2019

Week ahead

China manufacturing and non-manufacturing PMI (February): manufacturing PMI is expected to remain at 49.5, while non-manufacturing falls to 54 from 54.7. Manufacturing has been weak amid domestic headwinds and the ongoing trade dispute with the US. It is likely to remain in negative territory in spite of a recent thawing in relations between the warring countries.6,7

US gross domestic product (GDP) Q4: The quarter on quarter growth rate is expected to drop to 2.4% from 3.4% as the impact of Trump’s tax cuts recedes.8

UK manufacturing PMI (February): the index is expected to fall to 52.5 from 52.8 as some progress on the Brexit negotiations comes too late for many manufacturers. The IHS Markit/CIPS Manufacturing PMI rose to 54.2 from 53.6 in November, the highest reading in six months. However, much of the improvement appears to have been manufacturers stockpiling ahead of Brexit.8

Eurozone retail sales – Eurozone retail sales have been a rare bright spot for the region. However, other data has been weak and retail sales may not buck the trend this time.9

6 China says its manufacturing activity contracted for the second-straight month in January, CNBC, February 2019
7 Week ahead, February 2019, IG Index
8 UK factories build up stockpiles before Brexit, boosting PMI, Reuters, February 2019
9 Eurozone retail sales rise in rare sign of optimism in bloc, The Independent, February 2019

The opinions expressed are as of February 2019 and are subject to change at any time due to changes in market or economic conditions. The above descriptions are meant to be illustrative only.

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