April 18, 2017

Pegler’s market report – 18.04.17: Geopolitical tensions re-surface once again

As published in the Brighton Argus (18.04.17) Business on page 23 under the title Pegler’s Market Report:

Geopolitical tensions re-surface once again

Stock markets generally ended the week in negative territory as rising geopolitical tensions re-surfaced once again. In a week where Donald Trump has been pushing back against both the Russia-Syria and China-North Korea relationships, there is no wonder we have seen geopolitical fears dominate the agenda. It was also not surprising to see gold rally to a five-month high as some uncertainty crept into investors’ minds.

The pound hit a fresh six-week high against the euro following robust economic data released earlier last week. Steady inflation and forecast-beating wage data lifted the local currency. Meanwhile, the euro and dollar have both lost ground on heightened geopolitical tensions and the looming French presidential election. The dollar was also hurt by comments from US President Donald Trump warning the greenback is “getting too strong” and that he would like interest rates to stay low.

The first round of the French presidential election takes place on April 23, with markets uneasy about the victory chances of far-right leader Marine Le Pen, who has pledged to try and take France out of the euro. In the last two weeks, the emergence of far-left candidate Jean-Luc Melenchon as a potential winner has added a fresh worry for investors, as some of his proposals – such as a 100 percent tax band and a reduction in the working week – are considered market-unfriendly.

The Bank of England has warned that a consumer debt could be more of a risk to banks than mortgage lending, should there be an economic downturn. Fierce competition to win new customers has led banks to offer more credit to customers with increasingly long interest-free periods. But banks have started tightening lending criteria for credit card applicants in a move of an intensity not seen since the depths of the financial crisis in 2008 and 2009. A net balance of 33pc of lenders expect to tighten standards in the coming three-month period, according to new data.

Royal Mail shares rose after the announcement that it will be shutting down its pension plan. Despite the scheme currently running a surplus, an impending review of company contributions has been hanging over the group for some time. Royal Mail’s current contributions to this scheme alone are about 10% of total salary costs, including wages of staff who are not members of the scheme. These were expected to more than double to over £1bn in 2018, equivalent to around 25% of the group’s entire 2015/16 UK wage bill.

However, with a highly-unionised workforce, which has in the past shown itself willing to flex its muscle in defence of members’ rights, introducing an alternative plan is likely to prove costly.

By David Pegler, Brighton Capital Management