Weekly Market Update – 12 August 2019


The sort of surprise you expect

The GDP for the UK for Q2 2019 saw a 0.2% fall in output – bringing the year-on-year rate to just 1.2%. This was something of a surprise as the Bank of England had estimated flat growth for the quarter.

Not much of a surprise, mind – we’re all heavily caveating our forecasts and invoking the ‘Brexit uncertainty’ clause as if one additional ‘known unknown’ is the thing that fatally obscures our vision of the future.

Still, Brexit is actually the most likely explanation for the fall in aggregated output. Indeed, a surprisingly weak showing in Q2 follows a surprising strong performance in Q1. Rob KentSmith, head of GDP at the Office for National Statistics, points out that ‘manufacturing output fell back after a strong start to the year, with production brought forward ahead of the UK’s original departure date from the EU’. We may well see a similar effect boosting production in the run up to the 31st October. That, in turn, reduces the chances – a little at least – that we see a contraction sustained into Q3.

Of course the inventory rundown wasn’t the only contributor to a fall in the real value of UK output. Business investment remains subdued and, unnervingly, activity in the hitherto buoyant services sector was also weak.

On the brighter side, consumer spending held firm over the period supported by a strong labour market and energetic wage growth.

We’re guessing we will avoid a consecutive fall in output during Q3, thus swerving a ‘technical recession’. But there wont be much in it either way and, from the narrow perspective of an investor, the effects ought not to be malign either way. In fact, news of the second quarter fall encouraged sterling lower and forced bond yields down too while having no discernible effect on the price of London-listed stocks (those listed in Frankfurt, Paris and Milan fell by more on the day). Consequently, British investors would have felt the benefit in higher bond prices (presupposing they haven’t stripped their portfolio of bonds in favour of ‘alternatives’) and revalued overseas assets in particular. We remain positively enthusiastic about the prospects for UK stocks in the medium term.


More and more negative

When the 10-year gilt yielded just 0.6% during August 2016, we thought we’d reached some kind of nadir and we might then be moving from a period characterised by ‘ultra low interest rates’ to one characterised by plain old ‘low interest rates’. We were right for a while. The ten year rate climbed to 1.7% in February last year. More recently though, and really just in the last few weeks, it has plunged to less than 0.6%. That reduction is not just a British phenomenon. Today, around a quarter of all of the world’s listed fixed income securities yield less than zero – most notable are government bonds in Japan, Germany, France and Switzerland. I have to admit to being a little concerned about all of this. The consequences I fear are very far from immediate though. I’ll write more on this subject in coming weeks.