"Two problems in life, political ones insoluble, and economic ones incomprehensible". Alec Hume

Poor old Theresa May, when the Gods are against you they just don’t seem to be able to leave her alone. A coughing fit can happen to anyone at any unfortunate moment, and she must wonder who gave the security guards the day off ahead of her speech. The standing ovations were apparently too robust for the magnet to hold up the slogan, slightly more unfortunate. Whether this latest incident has any bearing on public opinion, it's probably unlikely, however, the press reports suggest it has caused a little more division on her leadership skills within her own party.

Supposing this latest unfortunate incident did hasten the possibility of a leadership change followed by an election. Events that one would expect the Conservative party to try and avoid to not increase the chances of handing power back across the divide. What would be the likely effect on capital markets should labour come to power. Bond prices would probably fall as investors would fear a collapse in sterling and a return to stagflation as the government would need to borrow to pay its obligations to fulfil its promises. The hope the high rate taxpayer would bail them out, history tends to suggest is unlikely. The possible effect on the FTSE 100 could be perversely a positive one. The potential for rising corporation tax rates would not help profits however perhaps the only way many individuals could protect their capital is to diversify its way out of the country via the FTSE 100. Overseas earning companies would benefit from the fall in sterling.

As markets are supposed to be forward-looking it's always worth studying to see if yesterday’s events have changed economic sentiment. If the speech did make investors feel more nervous about the Conservative leadership, based on the above one would expect bonds and sterling to fall. Sterling did fall but modestly, and that could just as easily be a reaction to some more mixed economic data. Bond prices were little changed. The FTSE 100 managed a modest rise. The reaction of the capital would suggest they took a slightly more charitable view of the Theresa May’s speech than the press did.

Some market commentators and financial journalists continue to speculate that after nine bull market years, the prospect of a change in the monetary policy stance from the Fed, will be the catalyst to bring it to and end. The Financial Times again trotted out a chart that has been doing the rounds for several years now, the correlation between central bank liquidity and the rise in the S&P 500. JP Morgan added their weight to this view in a piece of published research, that central banks risk another financial crisis, as they look to shrink balance sheets.

Citi seem less concerned at the actions of central banks as they still look for another 10% from equities as only a small proportion of their bear market check list provide sell signals. The cornerstone of their argument, 2017 looks like being the first year since 2010 when all major regions report higher earnings. Global EPS they forecast will rise 9% this year.

Posted on October 5, 2017 .