CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 72% of retail investor accounts lose money when trading CFDs with this provider (Saxo Bank). You should consider whether you understand how CFDs, FX or any of our other products work and whether you can afford to take the high risk of losing your money.
With 31st October 2019 fast approaching we are compelled to conclude a “no-deal” Brexit is more likely than not. Why is this?
The new government has embarked on high publicity spending commitments and making grandiose tax cut promises. These variously include:-
If delivered, these measures amount to a stimulus package of tax cuts and spending increases. All of these items might not get to the final cut, but we believe Johnson will lift government spending as part of a re-election campaign.
UK debt to GDP (ex. BoE’s debt holdings) stood at 74.1% of GDP in July 2019. The UK budget deficit fell to £23.6bn in FY19 but will hit £29.3bn in FY20 due to Brexit. We see Johnson as a spender with little incentive for budget restraint.
The decline in 10YR gilt yields over 2019 (1.3% to 0.47%) and in 2 year yields (0.42%) suggest a rate cut soon. A cut in Base rate to 0.5% in 2019 is likely.
An expected 0.25% reduction in the base rate will boost the UK consumer in Q3/Q4 2019 and cushion a “no deal” Brexit and/or combat a trend towards slowing GDP (-0.2%).
But whether a base rate cut helps capital markets is moot. The main critique of the 2019 monetary easing cycle is that rate cuts are far less effective and will achieve a fraction of the 2008/ 2009 impact. Central bank easing is a blunt tool that carries the full gamut of disproportionate impacts and societal problems. These are better understood than in 2008/ 2009.
In 2019/ 2020, central banks must guard against increasing the stock of negative yield government debt (c.$15trn), which is deflationary, reduces investment returns and represents a time bomb for the banking sector. It is a likely cause of the next crisis. If the response to slowing GDP growth is conventional rate cuts, then can only be employed very sparingly.
Four countries, Denmark, Germany, Netherlands and Finland have negative government bond yields across the yield curve spectrum. The extreme pricing of bonds brings the risk of a crisis when the trend reverses. Central banks might have to reverse QE i.e. turn sellers of their debt for yield curve normalization.
The August global re-pricing – a reaction to evidence of slowing GDP growth, the ongoing Sino-US trade dispute, and disappointing Federal Reserve monetary guidance was hard on UK/ EU capital markets with July peak to August trough losses (-8.1%/ – 11%) underperforming global (-6%)and US indices (-6.8%).
|Index||July 2019 peak||August 2019 trough||1MTH ∆ (%)|
In the re-pricing, investors ignored the higher chance of lower rates and no deal Brexit. The PM has increased the conviction that October 31st 2019 is firm and increased “no-deal” odds to c. 13/10 (www.oddschecker.com).
We see a hard Brexit as c.50% priced in with c. 1.5%-2.5% downside if it occurs. “No deal” is one of a host of risks, some with a greater downside magnitude (i.e. change of government). A UK rally is possible if i) global equities bounce or ii) a EU deal materializes that preserves UK/EU free trade or iii) Sino-US trade deal.
If the government survives, a hard Brexit followed by a General Election is the likely trajectory with a soft Brexit followed by a General Election a lower probability. H2 2019 will be eventful but is starting with low expectations, usually a good thing.
Please be aware that the following disclosures of Material Interests are relevant to this research note:
Company Name – Relevant disclosures: (2)
The report’s author certifies that this research report accurately states his personal views about the subject securities, which is reflected in the ratings as well as the substance of the reports.
Collins Sarri Statham Investments Ltd (CSS) does not in any of its publications take into account any particular recipient's investment objectives, financial situation, and specific needs and demands. Therefore, all CSS publications are, unless otherwise specifically stated, intended for informational and/or marketing purposes only.CSS shall not be responsible for any loss arising from any investment based on a perceived recommendation.
No publication (including recommendations) shall be construed as a representation or warranty that the recipient will profit, nor avoid sustaining losses, from trading in accordance with a trading strategy set forth in a publication.
This research is non-independent and is classified as a Marketing Communication under FCA rules detailed in their Conduct of Business Rulebook (COBS). As such it has not been prepared in accordance with legal requirements designed to promote independence of investment research and it is not subject to the prohibition of dealing ahead of the dissemination of investment research outlined in COBS 12.2.18.
Trading in the products and services offered by Collins Sarri Statham Investments Ltd (CSS) may, result in losses as well as profits as the value of investments may go down as well as up. You may not get back the full amount you have invested. Any reference to past performance should not be viewed as an indication of any future performance. Investments held in overseas markets are subject to the effects of changes in exchange rates which will impact on the value of the underlying investment. Investments made in AIM and penny shares carry an increased risk due to the difficulty in creating a market in these shares. There may be a substantial difference in the buy and sell price. Leveraged products such as Contracts for Difference (CFDs), derivatives, commodities & Foreign Exchange (FX), carry a higher risk to your capital and they can lose their value rapidly.
The information contained herein is based on materials and sources that we believe to be reliable however we make no representation or warranty, either express or implied, in relation to the accuracy, completeness or reliability of the information contained herein. Please note that the figures shown may, in some instances, be rounded to the nearest penny. Prices can move sharply from those quoted in this document. Current prices can be verified by calling one of our brokers. CSS is under no obligation to update the information contained herein. Neither CSS, nor its affiliates, nor its employees shall have any liability whatsoever for any indirect or consequential loss or damage arising from the use of this document.