We said at the start of the week two topics are likely to dominate the news channels, Brexit and tax reforms. The possibility that the US tax reforms that will lower corporation tax and in turn this give an additional boost to economic growth are ever closer gave another leg to the US equity market on Monday. Brexit negotiations, on the other hand, are not going so well, as the means by which Theresa May held on to power is now coming back to haunt her as the DUP vetoed her proposal on how the Irish border will work in a post-Brexit world.
Theresa May is once again stuck between a rock and a hard place, a lot of her own making. The way Theresa May has handled these negotiations might be compared to haggling for a rug in a Turkish market. We want fifty, I offer twenty, no we want fifty, ok then, and by the way the rug you thought you were buying you can have this one instead.
Sterling fell on the latest Brexit setback, however, remains close to the top end of its recent trading range against the US dollar. Sterling’s strength had been put down to renewed confidence in the Brexit negotiations. We have commented that that sentiment towards the strength of the UK economy may be becoming too negative and further recent data suggests that this may be the case. The Office for National Statistics confirmed that the UK economy grew at 0.4% in the third quarter, hardly gangbusters, but the latest Markit Purchasing Manager Surveys suggest that the economy should grow by that again in the fourth quarter if not a bit stronger.
The Office for Financial Research, as US watchdog tasked with monitoring threats to financial stability has warned that markets may be on the brink of a calamity again. Hardly new news, but if you are tasked with monitoring threats one assumes that you have to make statements like this. If a calamity did happen, and we are not suggesting it will at this moment, then at least you have covered your back. If nothing happens nobody cares.
They warn against record-high valuations in US equities, excessive risk-taking on the back of low volatility. They go onto refer to other risks, such as companies facing cyber-attacks. Shifts in market structure and a new structure to replace US libor. There are always risks and if one could foresee a market calamity it could not happen as the action would be taken to prevent it. They point out that markets move in cycles and that busts follow booms, was ever thus. After ten solid years of equity rises, all they are really saying is nothing can last forever. Anyone for lunch!