Weekly Market Commentary: 24th May 2019

Theresa May Confirms Resignation

This week we witnessed another Conservative Prime Minister reduced to rubble over Brexit, whoever ends up replacing her in Number 10 will likely suffer the same fate. Ultimately, she was undone by refusing to acknowledge a simple truth; leaving the EU will be complicated, lengthy and painful.  Until that truth is confronted, we’re doomed to repeat the same pattern; construct a fantasy, have it blown apart by reality, fail, resign. All the while allowing the anger and betrayal vote to swell making the country ever harder to govern.

This isn’t an argument for remain, but for realism. If leaving the EU is truly desirable, then confronting these hurdles is the only way to deliver it. Either by convincing people it’s worth it and having a credible plan to minimise the impact or decide it’s not worth the bother and move on to something else.  Unless events force it upon us, this revelation may still be two or three prime ministers away. For now, we get to watch Tory hopefuls compete for who next gets to have their reputation demolished by Brexit.

UK: Pret has a bite to eat

This week, it emerged that sandwich chain Pret a Manger has agreed to buy all of Eat’s 94 stores. As both companies are privately owned, the fee size wasn’t disclosed.  The move will instantly turbocharge Pret’s expansion plans for vegetarian only stores, which first started three years ago in Soho. Vegan and vegetarian diets are gaining in popularity, in 2018, one in six new products launched were vegan helping to propel the UK above Germany as the world’s leader for vegan food launches.

Elsewhere, Jamie Oliver’s restaurant chain collapsed putting 1000 jobs across the country at risk. The Italian food chain narrowly avoided administration last year after significant restructuring and a cash injection by Oliver of £12.6m. However rising costs, increasing popularity of home delivery and a desire for a more premium experience when eating out have all crippled the company. The same headwinds have also affected the mid-market casual dining sector with Carluccio’s, Gourmet Burger Kitchen and Strada all shutting down stores last year.

Global: Technological Curtain Tightens as Trade Tensions Mount

Markets have already priced in no changes to interest rates this year so there was little movement following the Federal Reserve minutes published this week. The Fed reaffirmed a patient approach despite ultra-low unemployment rates (3.6 per cent as at April). In theory, tight labour markets should help push prices up thus lifting inflation.  However, inflation has retreated further from the Fed’s two per cent target. Global growth concerns have yet to subside although conditions are improving.

Chinese Game of Thrones fans were the latest casualty of the trade war as streamers who use Tencent Video were unable to access the last episode. While this seems incredibly trivial, it signals an escalating technological cold war with political spats now trumping global business. In turn, multi nationals like Google and Apple are reviewing their Chinese supply chains which are at risk of being severed. In China, Huawei would be a beneficiary of rising nationalism with users switching from the likes of Apple. As the battle for supremacy continues, private companies will be forced to choose sides, much to the detriment of consumers.

Eurozone: Services grow as Manufacturing Struggles

PMI indicators, keenly watched by the European Central Bank due to its use as precursor for GDP growth, provided contrasting viewpoints on services and manufacturing sectors this week. On the one hand, manufacturing continued to contract indicating that intensifying trade tensions along with sluggish global growth continues to affect producers. Potential tariffs from the US on the European auto sector will likely cause further drag on PMI figures. The gauge dropped by 0.2 to 47.7 for the month of May.

On the other hand, the services sector which accounts for 73 per cent of the European economy continues to prop up the domestic economy. Stronger wage growth coupled with low unemployment levels has seen the indicator rise to 52.5. It will be interesting to see how long this divergence continues before manufacturing woes start to eat into the services sector.

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