Breaking up is hard to do, you either love it or hate it.

The Brexit fall out continues, the ability or otherwise for parliament to affect the negotiations either before or after article 50 is invoked is now making headlines. Can Theresa May negotiate a deal with the EU without parliaments agreement? Theresa May negotiating hand with Europe will be far weaker if they already know the hand she is going to play. On the other side of the coin agreeing a deal with the EU, which may then not be ratified by parliament is another difficulty. Nicola Sturgeon hardly surprisingly called once again for another referendum on Scotland becoming independent from the UK. Those who said breaking up is hard to do, are looking like being proved right.

The price of petrol and the attempt from Unilever to put pressure on food retailers are two tangible examples of the impact the fall in sterling has had on the UK consumer. The rising price of petrol is a fairly predictable result of the fall in sterling. Oil is priced in US dollars and the fall in sterling against the US dollar usually results in a rise in the price paid at the pump. Whether, when sterling moves favourably against the US dollar this benefit gets passed on in quite the same way is debatable.

The attempt by Unilever to put pressure on Tesco’s by raising the price of their products, is another likely result of the result in the fall in sterling. Many of the raw materials and the cost of shipping the products are priced in US dollars.  Unilever in years gone by one would probably have made a similar move, but negotiations would have remained behind closed doors.

The reality is that Unilever will hedge a lot of their currency exposure and also have somewhat of a natural hedge as they sell to all parts of the globe, but a company with pricing power will make use of it.

The price rise in petrol we accept as we need petrol, at least in today’s economy. There may be a day to come, if battery powered cars does become a thing of the future when they will face the same issues that Tesco’s face today.

In years gone by Tesco’s would have been accepting of Unilever’s demands, as Tesco’s would have just passed the price onto the consumer. In fact, they may well have welcomed the move by Unilever. For this reason, food retailers are supposed to be a good investment in times of inflation. The landscape is slightly different today as the traditional food retailers are unable to pass prices on quite so easily due to the competition they face from discounters, for example Lidl.

Sterling’s fall, has impacted international investors returns on owning UK gilts, and the threat of inflation has increased as we have just described, however the gilt markets reaction has remained pretty muted.

Ten year gilt yields have risen recently, and now trade back above 1%, however this is still close to record lows. The Two-year yields have hardly moved, at 0.2% exactly where it was a month ago. Two year gilt yields considered most sensitive to changes in rate expectations. 

Posted on October 13, 2016 .