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August 2016 Newsletter

Themes from the Month

US opinion polls suggest Hillary Clinton is ahead of Donald Trump in key swing US states as the campaign enters its final two months.

ARM Holdings has delisted ahead of its acquisition from Japan’s Softbank.

Redrow reported a 20% jump in revenues to £1.38bn helped by a 17% gain in volumes, partly attributable to “Help to Buy”.

Apple Corp CEO Tim Cook referred to the findings of the EU Commission, that Apple owed Ireland €13bn in back taxes as “political crap”.

UK Purchasing Managers Index rose to 52.9 ahead of expectations of 50 suggesting the UK economic expansion continued post the EU referendum vote.

Morrisons has made significant price cuts to its fresh vegetables, meats and poultry products ranging from 20%-30% – a move that could spark retaliatory action from other UK supermarkets.

Grafton the builders’ merchants flagged uncertain and competitive conditions in the UK alongside pre-tax profits of £62.8m up 8%.

UK ten year gilt yields rose slightly to 0.71% after touching lows of 0.6% during August.

BHP Billiton cut its annual dividend by 76% to 30 cents after reporting a $7.25bn loss.

Oil prices gyrated after supportive comments at the G8 meeting from Russia and Saudi Arabia, rising at first, but then falling back on lack of detail.

Forthcoming UK Events

6 September Bank of England 10 YR Gilt
7 September Halifax House Price Index/ UK Industrial Production/ BoE MPC Meeting
8 September Chancellor Hammond speech
9 September UK Balance of Trade/ UK Construction Output
13 September UK Core Inflation/ RPI/ UK Inflation Rate
14 September UK Unemployment Rate/ UK Average Earnings Rate
15 September UK Retail Sales ex Fuel
20 September UK CBI Industrial Trends Orders
21 September UK Public Sector Net Borrowing
22 September CBI Trends Orders
23 September BBA Mortgage Approvals
29 September UK Mortgage Lending/ BoE Consumer Credit
30 September UK Current Account Q2

Performance of World Markets (31/8/2016)

North American Value Change +/-(1M)% +/-(1YR)%
DOW JONES (Close) 18,400.88 -31.36 -0.17 11.33
S&P 500 (Close) 2,170.95 -2.65 -0.12 9.89
NASDAQ (Close) 5,213.22 51.09 0.99 9.15
Europe/UK Value Change +/-(1M)% +/-(1YR)%
UK 100 INDEX (Close) 6,781.51 57.08 0.84 8.54
CAC 40 INDEX (Close) 4,438.22 -1.59 0.00 -4.61
EUROSTOXX 50 (Close) 3,023.13 32.37 1.08 -7.54
Asia/Far East Value Change +/-(1M)% +/-(1YR)%
SHANGHAI COMPOSITE (Close) 3,085.49 132.10 4.47 -3.76
NIKKEI-225 (Close) 16,887.40 318.13 1.92 -10.60
ASX 200 (Close) 5,433.00 -129.40 -2.33 4.04
HANG SENG (Close) 22,976.88 1085.51 4.96 6.03

Companies Recommended August 2016

UK Research Date Recommendation Share Price Gain/ Loss*
RBS 1 August 2016 BUY 184p +9.5%

United Kingdom

Lack of immediate news on “Brexit” has not hurt sentiment. The PM took a two week Swiss holiday during August, so little was heard from the UK government. Cabinet ministers are focusing on how to deliver “Brexit”, apparently. The EU has ruled out negotiations before the Article 50 trigger.

The Bank of England’s move to halve the Base Rate to 0.25% on the 4th August was expected, however other measures, such as its corporate bond purchases were not anticipated. Governor Mark Carney noted the limitations of the added monetary stimulus commenting that he “was not a fan of negative interest rates”. This suggests limited scope for further rate cuts.

During early August the 10 year gilt touched record low yields at 0.6% but have since crept up on concern over short term inflationary pressures.

The move in UK equities over August was focused on the mid cap stocks that had sold off in the “Brexit” aftermath on concerns over the UK economy. These worries abated over August as companies broadly reported stability and a more or less continuation of pre-vote demand trends.

China/Japan

An official launch of Shenzhen- Hong Kong Stock Connect is expected soon. This will let HK investors buy Shenzhen stocks and vice versa. The China Securities Regulatory Commission has formed a work team with its Hong Kong counterpart to deliver this service which opens up access to the China market.

The move demonstrates that Beijing is less worried about currency outflows, and will encourage interest in Chinese blue chip stocks which typically trade at low valuations relative to their HK counterparts.
Japan’s GDP grew at 0.2% slower than the expected 0.7%. Japan’s exports fell 5.9% in Q2 due to higher competition in Asia.

The Bank of Japan’s negative interest rate policy is estimated to cut net interest margins and reduce the profits of Japan’s Big Three banks by ¥300bn (c. $2.9bn) in the year to end March 2017. This could limit the commercial banks’ willingness to lend hence leading to the Bank of Japan’s QE policy becoming counterproductive. Notwithstanding the poor economic data the Yen ended August broadly unchanged against the US dollar.

Europe

The EU Commission’s move against Apple and its open invitation to other EU tax authorities to review “tax deals” with multi nationals marks a watershed event. The nub of the EU’s claim that Ireland granted Apple favourable tax treatment that was not available to anyone else is going to be hard to dispute given the near zero tax paid on Apple sales routed though Ireland. The €13bn back tax demand will be appealed by both Ireland and Apple however the appeal to the European Court of Justice is unlikely to end in Apple’s favour. The rather blatant threat by CEO Tim Cook to review Apple’s commitment to Ireland looks like a bluff that will be called.

The ECB is looking at possible tweaks to its existing monetary stimulus which broadly consists of a -0.4% deposit rate and €80bn of monthly bond purchases. Eurozone data over August was broadly mixed with improving numbers in Germany (car registrations +8.3%) and France (PMI (purchasing managers index) 51.9 v 50.5).

United States

The US Federal Reserve is using a broader measure for the external value of the US dollar. The Fed disclosed its trade weighted broad dollar index measures the greenback against 26 (mainly emerging) economies (China, Mexico and Canada account for a combined 46% weighting). This is vastly different to the market’s measure, the traded US Dollar Index (58% Euro / 14% Yen weighted) and looks at the US dollar against 6 major currencies. Using the Fed’s measure the US dollar is far stronger than the US Dollar Index suggesting its zero interest rate policy can be maintained without hurting the dollar.

Statements from the “Jackson Hole” central bank symposium provided little new information. A move is unlikely ahead of the US Presidential Election on 8th November 2016. Many expect the Fed to wait until December 2016 to hike US interest rates.

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