Pegler’s market report – 05.07.16: A week to remember

As published in the Brighton Argus (05.07.16) Business on page 21 under the title Pegler’s Market Report:

A week to remember

Well that was certainly a week to remember: credit markets didn’t freeze up, the sky didn’t fall in, and while some equity markets have lost value, others have shown remarkable resilience, with the FTSE-100 in particular having one of the best weeks for many years. It was also an historic week for government gilts, where the yield fell below 1% on 10-year bonds for the first time in history as buyers rushed for a safe haven, wanting an escape from the perceived risk of the equity market due to fears of slower UK and global growth.

Inflation expectations for the next five years are considerably higher since the referendum. This along with an anticipated interest rate cut by the Bank of England and a fresh round of quantitative easing could bring real rates down meaningfully. Brexit is a negative shock for the UK economy but sterling weakness does provide a buffer.

The UK index also benefited from some kind of order returning to the Tory party, with Theresa May (who has so far provided the most thorough Brexit outline) being the front runner for PM, followed by Michael Gove, who some commentators believe has plunged a knife into the back of former heir apparent Boris Johnson with his own leadership announcement.

Barclays has already scrapped its Brexit crisis plans as the situation is much less severe than bosses had previously feared. The bank, along with the rest of the sector, prepared for a leave vote in the referendum by piling up cash to supply customers who wanted to withdraw money or shift into other currencies. But the plan was largely redundant, despite the large falls in banks’ share prices after the vote.

In addition to the financial services and travel businesses, building and housing stocks have suffered the largest falls. A major Singaporean lender said it would temporarily halt lending against homes in the capital. Singaporeans have in recent years been among the biggest buyers of London property, favouring new-build, luxury flats.

Meanwhile, UK house prices rose by more than expected in June, according to the Nationwide Building Society. It said that house prices rose by 0.2% in June compared to May. On an annual view, that takes national house price inflation to 5.1% on a seasonally adjusted basis.

By David Pegler, Brighton Capital Management