The Brexit negotiations between Great Britain and the EU are in full swing. An agreement on the conditions for the exit has to be reached by October, otherwise the so-called hard Brexit, i. e. a disorderly exit from the EU, could occur.
British companies are aware of this danger, and therefore some companies are already taking precautionary measures for the event of an emergency. The London Stock Exchange (LSE) has initiated emergency measures to protect itself from the consequences of a disorderly exit. New subsidiaries are to be established in the EU and additional licenses applied for. The high-street bank Barclays is also preparing for the Brexit by relocating jobs from London to the EU mainland.
However, the Brexit has so far been of limited importance in the current British reporting season. Following a clear loss in the first quarter of 2018, Q2 saw a return to form for Barclays with a profit in the billions. The competition, insofar as results have been made public, has also started the second half of the year with substantial profits. In addition, the LSE exceeded the forecasts with its half-year figures. Meanwhile, oil companies such as BP and Royal Dutch Shell benefited mainly from the sharp rise in oil prices in recent months, while commodity companies listed in the British FTSE-100 Index saw profits surge due to higher commodity prices and increased production volumes.
Numerous remaining disagreements between EU and Great Britain in Brexit negotiations
Even if companies are already beginning to protect themselves against a hard Brexit, both the UK and the EU want to avoid this option. However, it cannot be ruled out completely, because a fair number of points are not yet agreed. The British plan presumes a free trade zone for goods with the EU, but accepts restrictions on the free movement of services and persons. This contradicts the EU’s fundamental principle of the four internal market freedoms (goods, services, capital and persons), which can only be had together in one package, emphasised EU negotiator Michel Barnier. Nor is there a solution to the future border regime for the border between Ireland and Northern Ireland.
The uncertainty surrounding the Brexit is making itself felt in the British economy. In 2017, economic growth in the United Kingdom was 1.8 per cent, well below the eurozone average (2.3 per cent). In Q1 of 2018, the UK economy grew by a meagre 0.2 per cent.
One reason for the slow economy is the Pound, which has been weak since the 2016 Brexit vote. And while a weak currency is more likely to help export-oriented companies in the FTSE-100, boosting the index, it also causes import prices to rise. This in turn causes an increase in inflation, decreasing the purchasing power of the populace: in June, inflation stood at 2.4 per cent year-on-year. To contain this, the Bank of England (BoE) raised its key interest rate on Thursday by a quarter point to 0.75 per cent, the highest level since the financial crisis, by unanimous decision.
Despite the ongoing trade disputes between the USA and other countries, the head of the US Federal Reserve (Fed), Jerome Powell, remains confident about the U.S. economy. At the bi-annual hearing before the US Congress on Tuesday, he emphasized that, with the right monetary policy, the job market could remain strong with inflation close to the two-per-cent mark. The Fed’s current strategy of gradually raising the interest rate is therefore the best way to stay abreast of the economic upswing without throttling it. The Fed's key interest rate currently lies between 1.75 and 2.00 per cent. The central bank has announced two further interest rate hikes for the current year.
However, in their economic report, the Beige Book, which was published on Wednesday, the US monetary authorities also pointed out US companies’ concerns about the negative consequences of the current US trade policy. Industry representatives in all 12 Fed districts have expressed concerns about this, according to the report. In addition, some regions have already reported higher prices and supply problems due to the new trade measures.
The USA is currently in a trade conflict with several countries, but the dispute with China has recently escalated most. In early July, the US imposed 34bn USD in tariffs on the People’s Republic for alleged unfair trade practices, in response to which China immediately imposed retaliatory tariffs of the same magnitude. Last week, the US escalated again and threatened China with further tariffs worth 200bn USD. Should these also become effective, roughly half of all Chinese imports into the US would be subject to duties.
China also remains optimistic for 2018
In China, the additional tariffs have currently not yet led to a lack of economic optimism. The state planning authority expects the gross domestic product (GDP) to grow by around 6.5 per cent for the year 2018, and, in addition, the People's Republic remains ostensibly resistant to crisis. A spokesman for the National Development and Reform Commission (NDRC) recently said that China has sufficient political leeway to deal with shocks.
Q2 shows no visible effects of the trade dispute on China’s GDP. While economic growth slowed slightly compared with the same period of last year, economists expected this, as the Chinese government has been fighting risky loans for years. Q2 growth was 6.7 per cent, while the increase in previous quarters had been 6.8 per cent.
In the USA, growth has also slowed somewhat. GDP extrapolated for the year rose to 2.0 per cent in Q1 of 2018; in the last quarter of 2017 this figure was still at 2.9 percent. However, economists expect an acceleration for the second quarter of this year. In a survey conducted in late June, economists predicted a GDP growth of 3.7 per cent for the period from April to June.
Almost all asset classes have posted a mixed performance in the year to date, with most stock exchanges recording a negative development from the beginning of the year to mid-July. Only the US technology index and fringe markets such as Russia recorded significant gains. Investors hunting for yield were out of luck on the interest markets as well. Can we expect to see improvement in the second half of the year?
The development of and forecast for the most important economic indicator paints a favourable environment for the markets. Real global economic growth is strong, the rate of inflation in the developed economies is low, and the monetary policies are supportive. However, it remains to be seen what sort of effects the trade war between the USA on the one side and China and Europe on the other side will have. The risk of a recession has increased in the medium term. That being said, a lot of uncertainty is already priced in on the markets.
The overall asset allocation in the YOU INVEST funds remains unchanged. This means that the current equity portion accounts for 75% of the maximum bandwidth. In the bond segment, we remain positive vis-à-vis US high-yield corporate bonds and emerging markets local currency bonds. Within the equity allocation, we are relatively neutral against the global equity index in terms of regions: the USA accounts for about 55% of assets under management. As far as sectors are concerned, we prefer healthcare, financials, energy, and US information technology.
At its meeting in Vienna last weekend, the Organization of the Petroleum Exporting Countries (OPEC) and ten other cooperating countries – the so-called “OPEC+” – decided to increase oil production again. In the second half of 2018, the organization agreed to produce one million additional barrels (159 litres each) per day. This means that while the daily production limit of 32.5 million barrels, in effect since 2017, is to be maintained, unlike in the last few months it will now also be fully utilized. Due to the production shortfalls in Venezuela, OPEC has fallen well below its self-imposed limit in recent months.
OPEC has not announced which countries will produce more oil. However, market experts assume that not all countries will be able to ramp up production so quickly. They expect that Saudi Arabia, the United Arab Emirates, Kuwait and non-OPEC Russia in particular will be able to produce more in the short term.
Current FIFA World Cup host Russia is the world’s chief oil and gas producer and possesses an estimated 20 to 30 per cent of the world’s raw material reserves. The oil sector is also the key driver for the economy of the country itself: according to Erste Group calculations, the country’s economic growth is closely correlated with the development of the Brent oil price.
Oil prices rise after OPEC decision
Oil prices rallied immediately after the OPEC decision. Last Friday evening, the price for the North Sea grade Brent rose by more than two dollars to around 75.50 USD, and the price for the US variety West Texas Intermediate (WTI) rose by around three and a half dollars to over 69.0 USD.
Traders justified the price gains by the fact that the market had actually expected an increase in the production limit and therefore, accordingly, reacted with relief: before the meeting, Russian oil minister Alexander Novak had repeatedly mentioned a production increase of 1.5 million barrels per day. In addition, concerns that the OPEC+ countries would fail to reach an agreement proved unsubstantiated.
Oil prices continued to rise during the week. Brent grade oil saw a dip, as a large part of the additional oil produced by OPEC+ is likely to flow to Europe and Asia, but managed to recover fairly quickly. Thursday noon, Brent stood at 77.75 USD. WTI also rose sharply and climbed well over 70 USD by Thursday to 72.70 USD at the time of writing. However, the increase during the current week was less a result of the OPEC decision than of current US oil inventory data and political factors, as the US previously demanded that other countries stop importing oil from Iran.
Elections are scheduled for the next weekend of 24 June in Turkey, where, in an early ballot, the parliament and the president of the country are elected simultaneously for the first time. According to surveys, the state of the country's economy is one of the most important issues for voters. In recent weeks, Turkey has presented a rather mixed picture.
Recent economic growth rate figures have been promising, with an increase by 7.4 per cent in Q1 of 2018 compared with the same period of the previous year. In addition, unemployment fell to 10.1 per cent between February and April, marking the lowest level in two years.
Weak lira and high inflation put the central bank under pressure
The weak lira, on the other hand, is difficult for the country. The Turkish currency has been falling against both the Euro and the US dollar for some time, losing around 20 per cent of its value against the Euro and nearly 25 per cent against the US dollar since the beginning of the year. The most marked drop occurred in May, after President Recep Tayyip Erdogan announced in a TV interview that he would assume greater control over the Turkish central bank if he won the elections. On 23 May the dollar rose by 5.4 per cent against the Turkish lira to a record high of 4.9290 lira, the euro increased to almost 5.77 lira on the same day*.
The sharp decline of the lira forced the Turkish monetary authorities to hold a emergency meeting, after which key interest rates were raised significantly from 13.5 to 16.5 per cent. However, this proved a short-lived remedy against the downward trend. Consequently, the central bank raised the key interest rate by a further 1.25 points to 17.75 per cent at its regular meeting on 7 June, preventing a further slide of the Lira for the time being. On Thursday afternoon, the US dollar stood at around 4.75 lira and the euro at around 5.5 lira.
The weak lira is a problem for Turkey insofar as it significantly increases the prices of imported goods and thus fuels inflation. According to the Turkish statistics office, the inflation rate rose by 12.15 per cent in May to its highest level since November. By comparison, inflation was significantly lower at 10.85 per cent in April. In addition, the country's national deficit has increased perceptibly, increasing by 78 per cent to the equivalent of EUR 3.7bn in the first five months of the year. This imbalance in currency and inflation also shows in Turkey's consumer trust. In May, for example, the corresponding barometer of the Turkish Statistical Institute TurkStat fell by 2.8 percentage points compared to April.
Forecasts are not a reliable indicator for future developments.
All data as of 21/06/2018
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