November 8, 2016

Pegler’s market report – 08.11.16: A turnaround in sterling and gearing up for US elections

by David Pegler

in Insights Press Releases

As published in the Brighton Argus (08.11.16) Business on page 21 under the title Pegler’s Market Report:

A turnaround in sterling and gearing up for US elections

The pound enjoyed its best week against the dollar since October 2009 as a combination of an expected softening in the government’s hard-line stance on Brexit and a weakening dollar lifted the UK currency. But what was good for sterling was bad for a good number of large UK companies, which to date have benefited hugely from their overseas earnings.

What sparked the turnaround in sterling was primarily a London High Court ruling that the government cannot trigger Article 50 without parliamentary approval raising hopes of a ‘soft Brexit’ and prompting speculation of an early general election. Sterling was also lifted by the general hawkish tone from the Bank of England. At the same time, the dollar came under pressure as political risk surged after the race to the White House narrowed dramatically over the past week.

Global stocks retreated to their lowest levels since early July although US stocks generally bucked the trend as investors digested the latest non-farm payroll report. Data from the Labor Department showed total non-farm payroll employment increased by 161,000 in October, below expectations of 175,000.

Meanwhile, the VIX volatility index, which is considered the best gauge of fear in the market, climbed for ninth consecutive day to its highest level since the immediate aftermath of the referendum and its longest run of daily gains on record.

Last Thursday, the Bank of England Monetary Policy Committee (MPC) voted unanimously to keep interest rates on hold while forecasting that inflation would rise to 2.7pc next year. This would be the largest overshoot of its 2pc inflation target since the Bank became independent in 1997, and followed a forecast earlier in the week from the National Institute of Economic and Social Research that inflation would rise to nearly 4pc. The Bank also increased its prediction of economic growth to 1.4pc next year, up from 0.8pc forecast back in August.

Warning that “there are limits to the extent to which above-target inflation can be tolerated”, the Bank indicated that interest rates from now were as likely to rise as they were to fall.

Over recent weeks industry participants have been debating the global implications of the US elections. General consensus appears to be that a Clinton victory will not be especially market-sensitive; Most point to a Trump victory triggering a 3-5pc S&P sell off; A Clinton victory could be unhelpful for healthcare stocks; A Trump win could offer some respite for energy and/or utility stocks which have been under environmental scrutiny; Emerging markets equities are vulnerable to a Trump victor – there are fears of an increase in protectionism; Any post-election rally in the US dollar would also be unhelpful.

By David Pegler, Brighton Capital Management