Markets Weekly podcast – 18 November 2024
18 Nov 2024
US and UK politics special
22 July 2024
What could political upheaval in the US mean for financial markets? Tune in as Sonia Fernandes, Vice President of Government Relations and Policy at Barclays, discusses the latest developments in the presidential race. Topics include potential candidates for the Democratic party and the most recent voter polls.
Turning to the UK, she covers the 40 bills set to be introduced during this parliament and the potential implications for investors.
Meanwhile, Henk Potts examines UK inflation, the second-quarter corporate earnings season and the latest announcement from the European Central Bank.
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Henk Potts (HP): Hello, it’s Monday, 22nd July, and welcome to the Barclays Private Bank Markets Weekly podcast, the recording that will guide you through the turmoil of the global economy and financial markets. My name is Henk Potts, Market Strategist with Barclays Private Bank. Each week, I’ll be joined by guests to discuss both risks and opportunities for investors.
Firstly, I’ll analyse the events that moved the markets and grabbed the headlines over the course of the past week. We’ll then consider the recent political developments in both the UK and the United States. And finally, I’ll conclude by previewing the major events and data releases that are likely to shape the week ahead.
Now, a cyber pandemic, sticky services inflation and earnings jitters sapped risk sentiment and pushed stocks lower during the course of last week. Meanwhile, macro traders are assessing the outlook for US fiscal and trade policy following Joe Biden’s withdrawal from the US presidential election race, and as former President Trump benefits from the tailwind created by the Convention and assassination attempt, which has helped to galvanise Republicans.
Economists are projecting that a Trump victory could result in a higher growth rate for the US economy, for elevated levels of interest rates and a stronger US dollar, although a new Democratic candidate, most likely to be Kamala Harris given her recent endorsements and donations, is likely to add to the political uncertainty in the coming weeks.
Markets, as we know, are likely to remain focused on the Democratic nominee process, policy announcements and the polls emerging from those swing states, including Pennsylvania, Wisconsin, Michigan, Arizona, Georgia and, of course, Nevada.
Now, turning back to equity market performance, on Wall Street there was some evidence of a rotation away from the high-flying tech stocks during the course of last week, as investors sought value. The Nasdaq fell 4% over the course of the week. In fact, its worst weekly performance in three months, although we should remember the index is still up 16% year to date.
The S&P 500 was also down during the course of last week, off by round about 2%.
In Europe, somewhat of a similar picture. The STOXX 600 fell every day during the course of last week. The index dropped 2.7%, its biggest weekly decline since the week commencing 15th October. It’s now back to its lowest closing level since 6th May.
Now, the European second-quarter earnings season got off to a bit of a nervous start, it has to be said. Luxury-goods companies and mining stocks blamed weak demand in China, so cut their profit guidance. This week, the focus will remain on the earnings but more likely to be focused on those US tech mega caps.
Now, in commodities, gold rose to an all-time high at the start of last week, overtaking the record mark set back in May, as investors ramped up bets the Fed will be more aggressive with US rate cuts, as inflation moderates. The precious metal has also been boosted by gold’s ‘safe-haven’ status, aggressive central bank purchases and strong demand from Chinese consumers. Gold was trading at $2,405 an ounce this morning.
On the macro font, policymakers in the UK had a wealth of data to digest, including higher-than-expected near-term inflation, an easing labour market and weak UK retail sales. Price pressures in the UK proved to be stickier than expected, the headline CPI holding steady, at that 2% mark, for the second consecutive month. Economists had forecast an easing down to 1.9%.
Services inflation remained elevated, printing at an unchanged 5.7%. Recreational prices continued to rise. So, if you look at the prices of restaurants and hotels, they rose by 6.3% in the year to June, that’s up from 5.8% in May, as companies passed on higher minimum wages to customers, and we saw the impact of the Taylor Swift tour playing out in those figures, although a further easing of food inflation and lower clothing and footwear prices helped to offset the increases elsewhere.
Despite the higher-than-expected inflation print, the mixture of easing household inflation expectations, the softening labour market and lacklustre activity levels, as evidenced by the soft retail sales figures, should be enough to encourage the MPC to push ahead with an interest rate cut, we think, at the August meeting.
Moving on to Europe, where, as expected, the European Central Bank kept interest rates on hold last week, and warned that domestic price pressures are still high, services inflation is elevated and headline inflation is likely to remain above the targeted level well into next year.
Now, looking forward, the accompanying statement stated that the Governing Council were not pre-committed to a particular rate path. At a press conference, President Lagarde refused to hint at a September cut, as some commentators had predicted, preferring to say that the decision remained wide open and would be dependent on the incoming data and increased confidence in the disinflationary path.
Given our view of a slower recovery and moderating inflation, there should be further scope for rate cuts, we think, during the course of this year and through the course of 2025. Therefore, we forecast a potential 25 basis-point rate cut at both the September and December meetings, resulting in a 3.25% deposit rate at year end.
In 2025, we expect the Governing Council to cut rates by 25 basis points at the January, March and June meetings, therefore, suggesting a terminal deposit rate, at the middle of next year, of 2.5%.
So, that was the global economy and financial markets last week. In order to discuss the recent political developments on both sides of the pond, I’m pleased to be joined by Sonia Fernandes. She’s Vice President of Government Relations and Policy at Barclays.
Sonia, great to have you with us today. Let’s start off with the US presidential election. What are the implications of the dramatic events that we’ve seen over the course of the past week or so, including the attempted assassination of Donald Trump, the Republican Convention and that decision over the course of the weekend by Joe Biden to pull out of the election race in November?
Sonia Fernandes (SF): Thanks, Henk, good morning. And, yes, indeed, we wanted stable politics in the UK, but they look positively sleep-inducing compared to the dramatic events in the US in their election race. Indeed, we’ve seen Biden step aside and endorse Kamala Harris as the current VP, as he’s thrown his support behind her.
Just to be clear, this is not the nomination. So, the way that it works in the US is that the Democratic Party will rally around and confirm their nomination of who would run for President, but, indeed, quite a number of the seniors in the party have endorsed Harris.
The process, we’re not entirely sure what will happen because, typically, when there is an incumbent government, right, we don’t see a Convention in the same way that we’ve seen with the Republicans, where they have rallied around and effectively everyone has fallen in line to endorse and confirm their nomination of Trump as running for president, along with VP JD Vance. So, we’ll see how that unfolds over the week.
Interestingly, former President Obama has not specifically endorsed Harris. He has thrown his support behind the leadership overall, so we’ll see what he says there as well. Indeed, who will win the VP candidate selection? And there’s a lot of candidates that will no doubt be now clamouring for attention and wanting to stick their hat in the ring.
So, a little bit of a way to go on that final Democratic nomination, but, indeed, it would be surprising not to see Harris confirmed as the formal selection for the Democrats.
In terms of former President Trump, yes, of course, the assassination attempt in a way has really rallied the party around him, and the public sentiment about the ‘courageous leader’ stepping up in the face of attack.
So, we’ve seen a slight shift in the polls, increasing Trump’s favourability rating to about 40%, and that’s the highest for Trump in the poll in the last four years, so he’ll no doubt try to capitalise on that. And, actually, the story of unity we’ve seen has played out. So, that has appealed to the voting public rather than division, which is the typical sort of key issues that the Republicans tend to pull out.
And then, last but not least, of course, is what does this actually mean for the outcome of the US elections? Three-and-a-half months is still very far away. You mentioned those swing states and which way they might lean.
And then, of course, what might come up as the key voter issues. Of course, we know that abortion and immigration will be top of the list, but things like the policy in the Middle East will also be a factor, and in particular, how the Democrats might try to distinguish themselves, or how particularly Kamala Harris might try to distinguish herself from Biden’s views in the coming months.
So, a lot to unfold in the US, but certainly keeping us well hooked to unfolding events over the next couple of months.
HP: Yeah, it’s certainly set to be an exciting two weeks on the US political front, but let’s return back to the UK, where the focus is very much on last week’s King’s Speech, where His Majesty set out 40 different bills which will be introduced in this parliament. What does it tell us about Labour’s agenda and were there any surprises?
SF: Yes, and it definitely was a sign of Labour’s seriousness where they had been talking about being prepared for governing. And this really is, it’s governing plus, plus, you know, 40 bills is highly ambitious. The term of a parliamentary session is typically 12 months, and we might see a scenario where this extends to potentially 18 months or 24 this time, just to get through that volume of bills in the parliamentary time available.
There were no surprises really, and, again, that, in and of itself, was not a surprise to that point of the Labour Party really leaning into stable government with, ‘don’t look at us, we’re not going to surprise anyone, we’re going to be very staid’.
But a lot in there in terms of the bills, but also, interestingly, it does leave very little room for anything other than what’s in the King’s Speech, just by virtue of the time taken for legislation to get through the parliament.
But there’s a bit of something for everyone in there. But another thing to note, too, is that timing is still vague. So, the timing was vague prior to the election, in terms of their manifesto commitments, and now, after that, and into the legislative session, timing still remains vague.
And I think part of that is because of the Budget, which is still to come, and that will happen, we think, around October.
HP: So, limited surprises, but which announcements might have an impact on investment and private capital specifically?
SF: Yeah, there’s a bit of, there’s quite a lot in there to be excited I do think. In particular, the Planning and Infrastructure Bill. So, this is looking at making improvements to the planning system at a local level and accelerate housebuilding and infrastructure delivery. And, of course, as we know, the government is very keen to achieve economic growth and in a time when, you know, you’re not looking to achieve that through productivity growth, of course, housebuilding is the way, and building, in general major infrastructure projects, is the way to do that.
So, what that might that mean in terms of where potential investors might look to put their money? You know, there’s very little said at the moment about the financing of, you know, the infrastructure projects and of housebuilding, either from the form of how you might generate investment to achieve that, or from a bank perspective, you know, in the form of mortgages and lending. So, a lot there if that unlocks.
And that bill in particular, we think, could create a bit of consternation amongst the backbench, you know, particularly the ‘not-in-my-back-yard’ sort of rhetoric, where people feel that houses are being built on green fields and brown fields around them, but we can see Labour absolutely wanting to push through that legislation as quick as possible, possibly to, a you know, achieve that economic growth but, quite frankly, to avoid a political conversation in the debates.
Secondly, the Bank Resolution (Recapitalisation) Bill, not a very sexy title, but puts forward proposals should the economy face something like the Silicon Valley Bank failure, so grants the Bank of England powers to access the Financial Services Compensation Scheme to fund any sort of resolution for a failing bank. So, very much trying to assert the stability of the UK from a banking perspective.
Some others that I think will be of interest include the Digital Information and Smart Data Bill. So, this is about how we adopt secure digital ID products and smart-data schemes. So, for those in those sectors, I think that will unlock quite a lot there.
We are also seeing the Pensions Bill, which, actually, wasn’t very exciting, you know, a lot of people are very interested in what will happen in pensions, but that was kind of characterised as a tidy-up exercise, as things already promised that hadn’t quite worked themselves through prior to the election.
So, tinkering around the edges, I would say, but it shows, I think, the types of measures and that definitely signals the Government’s intent to think about how they do further reform the pensions industry and, of course, they have to do a sort of big review there, so watch that space on pensions and the opportunities that might present.
HP: Sonia, to finish off, let’s get a little bit technical. It’s been a while since we’ve paid close attention to the workings of parliament itself. Can you talk us through the process for these pieces of legislation?
SF: Yes, of course. And I think the first thing to say is that it’s nothing extra special. We’ve had a lot of questions about that, but a King’s Speech, you know, happens at every parliamentary session and the Bills will go through the House of Commons and the House of Lords and get read. They’ll be laid one at a time, so even though, you know, they’ve been listed out, there are only a few that have actually been laid in parliament for that debate to translate into a final Act, and that’s, of course, the Fiscal Responsibility Bill and the planning one as well.
So, we’ve seen some of them start to trickle through. They’ll go through the process. We don’t know the time, there’s no set time around that process. Of course, it also means, you know, there’s an element where the opposition or independents might introduce amendments to those bills to elongate the debate time. So, there’s no set timing on when legislation becomes acts and then take effect.
I suppose the interesting thing in all of this is that, you know, and again just to be clear for our audience, this is not a Budget, so no tax measures are included, although VAT and school fees was referenced in the King’s Speech. That will come in the Budget after the full OBR process, which the chancellor has now commissioned.
So, we are expecting the Budget to happen in early October, and that’s when you’ll see tax measures introduced. And that can happen at a quicker timetable because that’s just a, you know, that’s a flick of a switch, so to speak, rather than a change to legislation.
So, looking ahead now, we’re thinking about the Budget and what that might tell us around spending, but, otherwise, you know, it’s a slow process through the mechanics of Parliament for legislation to become acts.
HP: Well, thank you, Sonia, as always, for your insight in today’s fast-moving political developments, particularly those in the United States. There’s no doubt that we’ll be calling on your expertise again as we go through that process in the coming weeks and months.
Let’s move on to the week ahead, where the focus will be on the UK PMI and US GDP prints. In the UK on Tuesday, we expect the PMI to show a small post-election bounce, with anecdotal evidence suggesting that the election had generated some caution.
In the US, on Thursday, we get that second-quarter GDP number. We expect the advance estimate to show a 2.5% quarter-on-quarter increase, so accelerating from that 1.4% that we saw in the prior month, reflecting steady underlying strength in private domestic final purchases.
Luxury and GDP growth from the prior quarter mainly reflects the pickup in private inventory investment, which we expect to contribute around 1.7 percentage points more to growth than in the first quarter, so more than offsetting that wider trade deficit that’s been playing out.
And with that, we’d like to thank you once again for joining us. I hope you’ve found this update interesting. We will, of course, be back next week with our next instalment but, for now, may I wish you every success in the trading week ahead.
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