British budget coming out under shadow of Brexit talks
Five big themes likely to dominate thinking of investors and traders in the coming week and the stories related to them
1. Show May the money
It could be another busy week for sterling traders. British finance minister Philip Hammond delivers his annual budget on Wednesday, and to say he goes into his annual set piece on a weak footing would be an understatement.
Politically, the government is weak. Its parliamentary majority is razor thin and Prime Minister Theresa May’s authority has been undermined by a series of gaffes and cabinet resignations.
There’s also been an alarming lack of progress on Brexit negotiations – so much so that Ireland’s prime minister, referring to a lack of clarity over the future status of the Irish-UK border issue, said: “Sometimes it doesn’t seem like they have thought all this through.”
On the economy and public finances, Hammond is constrained too. Expectations of slower growth in coming years due to Brexit would hit tax revenues, productivity growth is chronically weak and real earnings are falling thanks to above-target inflation.
There remains little appetite in the Conservative Party ranks to do what the opposition Labour Party has pledged and open the public purse for investment. As ever, if there are any surprises – positive or negative – market reaction will be most visible in sterling. The pound is holding up, but volatility is rising.
2. Sa(y) it ain’t so
South Africa’s dire budget last month and talk of a potentially hefty increase in fiscal spending have raised the stakes for S&P Global’s and Moody’s Nov. 24 credit rating reviews of the junk grade-threatened country.
If either cut their local currency debt ratings into junk, the government’s $125 billion stock of rand-denominated debt would no longer be eligible for the world’s big global bond indexes.
That would almost certainly trigger another round of selling in South African markets and pile yet more pressure on the government by further driving up borrowing costs that have already soared 13% over the last eight months.
3. Made in Japan
Japanese trade data in the coming week will be a good gauge of whether the impressive growth streak in the world’s third largest economy can keep going.
It grew faster than expected last quarter and is enjoying its longest uninterrupted expansion since an eight-quarter hot spell from April-June 1999 to January-March 2001 at the height of the dotcom boom.
The main reason this time, however, is external demand. Things like car and electronics shipments added 0.5 percentage points of the latest 1.4% annualised quarterly growth rate, whereas private domestic consumption dropped 0.5% from the previous quarter.
That doesn’t bode well for the Bank of Japan’s inflation goals, but with the lifespan of Abenomics extended following the country’s recent elections, that goal may have to wait.
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4. Lucky number 13?
Wall Street will take a break for Thanksgiving on Thursday and Friday, meaning global trading is likely to lighter than normal.
It will also give investors time assess how serious they think the wobble in world stocks over the last couple of week really is.
The overwhelming consensus from the world’s biggest investors at the Reuters 2018 summit at least was that one of the longest bull markets in history just keeps on keeping on. A crowded trade maybe? A bubble in the making perchance? But no big crash for now.
And though it was a second down week in a row for MSCI’s All Country World Index, Thursday’s bounce has kept it just about positive for the month. Next week could therefore be crucial in determining whether November makes it a record 13 months of unbroken gains.
5. Margin debt
With US stocks still only just off record highs, investors are looking for possible signs of over-exuberance and one indicator in the past has been margin debt.
The Bank for International Settlements highlighted in a recent report that equity investors used “record amounts of margin debt to lever up their investments, even though price/earnings ratios indicated that equity valuations may be stretched by historical standards.”
However, a look at margin debt as a proportion of the S&P shows a different and broadly more stable picture.
What some investors are therefore asking is why isn’t it higher given the extraordinary low market volatility?
Low volatility can be favored by those trading on margin. Every investor’s fear of margin is that the market comes down quickly and you have to sell. That was a big negative in the financial crisis.