The Daily Reckoning UK

More Trouble In Paradise?

Darren Sinden

by

Posted 16th June 2017

European stock markets spent most of Thursday in the red, with many markets, including the UK, trading down by 1% or greater during the day.

We could construct a justifiable explanation for the sell-off in London by blaming it on the news from the Bank of England, released at noon yesterday, that although UK interest rates will remain unchanged at +0.25% for another month, there is a growing body of opinion that believes they should rise in the near future.

True, the Bank’s Monetary Policy Committee voted 5 to 3 in favour of no change at Thursday’s meeting, but dissent is growing amongst committee members. One more hawkish convert will make the voting a dead heat at 4 to 4.

Sterling rallied on this news and, of course, the stronger pound is negative for the export-heavy FTSE 100 index.

And though that narrative would fit the day’s events very nicely, it’s worth remembering that the FTSE was already down before the bank’s monetary policy committee announced their decision.

With US 10 year bond yields falling and European equities seemingly out of favour, you would have to say that things feel very ‘risk off’.

Indeed the Japanese currency (Yen) gave off similar signals early on Thursday,as it traded higher against the US dollar before the dollar reasserted itself somewhat.

US equities also started the day lower, with the tech-rich Nasdaq coming under pressure and finishing around 0.50% lower on the day.

However, if you drilldown into the individual constituents, there are a good number of stocks which are on course to finish the week down 4% or more.

Of course, the technology sector has always been volatile. Indeed that volatility, which in recent times has shown itself to the upside, has been one of the draws for investors – many of whom are sitting on handsome gains as a result.

I wonder if some of those investors are thinking about booking at least a portion of their profits now, and if they do take money off of the table, what impact that will have…

This month’s Bank of America Merrill Lynch Fund Manager Survey found that money managers believe being long the Nasdaq (Nasdaq stocks) was the most crowded trade in the market.

Those same fund managers are responsible for investing hundreds of billions of dollars, so their opinion is worth noting.

With US interest rates rising and UK rates thought likely to follow suit in the second half of this year, we could be in for an interesting couple of quarters, as monetary policy divergence plays out further.

I say that because interest rates in Europe and Japan look set to stay below zero for the foreseeable future.

As such, global investors will have an interesting choice about where to park their money in the closing months of 2017.

There’s trouble on the continent too…

We touched on the issues confronting UK and US retailers earlier this week, with the anticipated interest rate rises mentioned above being just one of a number of significant challenges faced by the sector.

These challenges extend into Europe and further afield as well, and are summarised today in research notes from a couple of leading investment banks…

The notes focus on one of Europe’s biggest clothing retailers – Sweden’s Hennes and Mauritz, or H&M as it’s more commonly known.

Both notes highlight what they call the structural issues that confront the group, including declining sales. The issues are not necessarily peculiar to H&M, but the question is this: can management do anything to offset these trends?

US bankers, Goldman Sachs, think not.

The reason this matters is that H&M has for so long been one the golden boys of European retail, delivering growth and expanding rapidly. It had developed what the market terms ‘leadership’, but now that it’s in danger of losing its lustre, investors may jump ship quicker than they might have done if it had been a more pedestrian business.

The skill-sets that helped grow the business are unlikely to be the ones that are required to manage a contraction, thats important because at the end of the day, the markets have little room for sentiment.

Staying with retail, there were better than anticipated numbers from Tesco this morning, but the UK’s largest grocer noted that it was its efforts to limit the effects of price rises that was winning customers back.

Tesco’s balance sheet won’t be able to subsidise consumers for ever, so over the longer-term something will have to give.

The takeaway from all of this and much of the rest of the weeks action is this: Consumer behaviour and spending will become an increasingly important factor in UK, US and European markets over the balance of 2017 and beyond, because they will act as a barometer for the wider economies.

As if to highlight this fact, data showing wage growth France and the end of falling wages in Spain has recently hit the tape.

What we need to know now is how, and if, those consumers will spend their money.






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