Weekly Market Insight - March 2nd 2018

For this week’s takeaway global assets are in retreat; RISK OFF.

UK

The Bank of England’s most dovish member turns hawkish, Sir Dave Ramsden now expects 3 to 4 rate hikes this year, stating they would come sooner rather than later. The BOE has shut off its Term Funding Scheme (TFS) thus raising the costs for borrowers, particularly mortgage market as the supply of cheap money to banks dries up. Borrowers entered mortgages worth £21.9bn in January and the re-mortgaging properties rose by 4.6%, but loans taken to purchase fell 5%, a sign that demand may be weakening.

Tesco received the go-ahead from shareholders at their AGM for a takeover of Bookers, this will make Tesco’s the UK’s largest food group. Toys R Us and Maplin went into administration with a loss of 5k jobs. 15k Jobs will be lost in the retail sector by the 2018 Retail crunch with household names either sinking into administration or cutbacks due to poor quarterly sales, rising costs and squeeze on consumer spending. Other names to be aware of are Card Factory, Moss Bros, Laura Ashley, Carpetright and Mothercare have all issued profit warnings this year. Prezzo set to close 100 sites and enact their closure plan and currently are preparing company voluntary arrangement (CVA). Whitbread invested £250m acquiring 19 hotels in Germany as it targets global expansion for Premier Inn “ ˜Key strategic priorities is to focus on building strong and sustainable growth in key international markets”. Sky beefs up TV offering with Netflix tie-up. Retail stocks have shed £1.3bn in value in the past few days as investors took a gloomy view of the sector.

UK Manufacturing Purchasing Managers Index fell to 55.2 and the Construction Purchasing Managers index rose to 51.4. A print above the 50 levels denotes expansion in the sector, which is being boosted by the post Brexit weakened Sterling for foreign demand with no change to trade rules. There remain concerns over the sustainability of strength in the sector.

US

The Federal Reserve (Fed) is now expected to raise rates in March, traders see a 95.5% probability of a 25bp hike in March with 3 hikes on the card for the year. Powell’s first public outing, a testimony before the house and senate committee. Jerome Powell had a bullish view on the US economy and to continue to raise rates. Gradual increases in the federal funds rate, and even a potential four hikes this year, in addition to Trumps tax cuts which will likely to add further stimulus. Fed member Kashkari stated wage growth will be an important indicator of economic growth.

President Trump announced an increase to tariffs imposed in steel and aluminium imports, will have an impact countries such as Canada, Russia and China is designed to prevent unfair trades according to Trump. The US is the world’s largest importer of steel so the Dow Jones Index slumped on the news by more than two percent. US steel producers saw their share price surge.

Cryptocurrency

EU could potentially be ready to introduce cryptocurrency regulation. They will hold a meeting in March to discuss the proposal. DeBeers and Lucara diamond corp are investigating the potential of using Blockchain technology to track gems throughout their journey on the supply chain. The SEC have launched a cryptocurrency probe into ICO tokens and exchanges. Bill Gates states “Main feature of cryptocurrencies is their anonymity, I don’t think this is a good thing”. Whereas, Winklevoss brothers said bitcoin is equal to or better than gold across the board in terms of scarcity, portability, fungibility and durability (As known investors this comes as little surprise). The head of the BOE, Mark Carney is keen to hold the crypto ecosystem to the same standards and regulation as the rest of the financial system. Even so, he remains open minded about the possibility in the future.

Lithium

Recent news from apple to buy into cobalt has led to a surge in Lithium. There is a market perception that Lithium’s price may drop 45%, with new projects and expansion plans in Chile threatens to add 500,000 tonnes per year to global supplies by 2025. The requirements to meet electric vehicle targets and this potential penetration will be insufficient to offset this. Morgan Stanley states Lithium prices now $13,375 per tonne and by 2021 will be $7000 per tonne.

Oil

Strong US demand and Saudi comments of a continuation to curb production which is in-line with OPEC led efforts. US crude oil production shattered a 47 year output record in November and then retracted slightly in December. EIA shale oil production from shale continued to upend global supply. Oil output rose to 10.057m bpd in Nov and revised in Dec to 9.949m bpd.

Emerging Market

India regained its status as the world’s fastest growing major economy, it grew 7.3% and surpassed China.