Weekly Market Commentary – 17 May 2019

Markets Remain Unusually Calm Amidst Escalating Tensions
This week, despite the escalating trade war with China and a growing possibility of an actual war with Iran, US markets largely shrugged off rising uncertainty. While we are advocates for ignoring the noise and focusing on the long term, this still seems unusually zen. While it’s possible that the erratic behaviour of President Trump is now fully priced in, it could also be that the market has now become complacent and is too heavily discounting anything serious happening. The latter is more likely, which means a violent reaction to these events could still be on the cards if expectations shift.

Elsewhere the markets had no illusion about the direction of Brexit talks between the government and opposition, as the pound hit a three month low against the dollar. Reports are that the whole exercise has been futile, with May refusing to acknowledge the realities of the Irish boarder and Corbyn refusing to acknowledge what decade it is. While most are now expecting Theresa May to be gone in July, we still think she has a plan to cling to power. Expect some convoluted parliamentary shenanigans when she brings her bill back to the commons next month.

UK: CVA’S Rise as High Street Retailers Struggle
Weakening demand, rising ecommerce growth and political headwinds all affected the retail sector in 2018 and the narrative remains unchanged this year. Large high street firms such as the likes of Arcadia group (Topman, Topshop) and Debenhams having either undergone a compulsory voluntary arrangement (CVA) or are thinking of going down this route. A CVA essentially offers struggling companies a partial rental reprieve much to the chagrin of commercial landlords.

One of the biggest landlords, British Land, posted losses of £319m for this year with most of its five percent drop in property value driven by declining retail assets. Similarly, Landsec’s portfolio
value dropped by £557m. Meanwhile in a bid to revitalise the retail sector, the government will implement a new register to allow potential tenants to easily check-up ownership thus speeding up the letting process. While increasing transparency is helpful, the bigger challenge will be aligning the interests of a diverse set of landlords including investment trusts, the public sector and overseas investors.

Banks: Metro Bank Raises Additonal Funding
Metro Bank, one of the better known up and coming retail banks, this week was forced to quash “fake news” rumours on social media surrounding its financial health as customers rushed to withdraw savings. In January the bank admitted an accounting blunder which gave incorrect risk banding to some of its risky commercial property loans. As a result, the amount of money the company needs to put aside to act as a buffer significantly increased. This week Metro Bank finally managed to plug the £350m gap in reserves.

The mistake came at inopportune time for the bank, a poor first quarter saw profits before tax fall by half to £4.3m. Coupled with some of its business customers withdrawing funds this has led to share price plummeting 70 per cent since the turn of this year. The bank isn’t doomed quite yet however, new customer growth continues to increase and it is pressing ahead with its plans to expand.

Eurozone: EU records positive quarterly growth
Germany’s economy rebounded with GDP expanding 0.4 per cent in the first quarter of 2019, temporarily quelling recession fears. Private consumption, construction and increased government spending all boosted growth, while government spending on the other hand declined. Expectations for economic development over the medium term however, is down for the month of May. The Zew indicator which captures economic sentiment, dropped to -2.1 points from 3.1 for the month prior and was miles off analysts’ expectations of 7.1.

Wider Eurozone growth also matched Germany’s growth rate with all key member states recording an expansion in economic activity. Current growth rates are far from resilient and will most certainly be tested as headwinds intensify. After last week’s trade talks broke down between China and the US, European firms are bracing themselves as the try and avoid getting caught in the cross fire.

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