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London Quick Take - 16 July - Sterling jumps as Burnham appears to steer clear of Ed Miliband, UK growth picks up, stocks lower as semis hit again
Neil Wilson
Investor Content Strategist
Note: This is marketing material. This article is not investment advice, capital is at risk.
UK gilt yields moved lower and the pound moved up on reports Andy Burnham will not appoint Ed Miliband as chancellor...sterling trades at a two-month vs the dollar and 13-month high against the euro. The chatter is home sec Shabana Mahmood is the front-runner. The worry with Ed is fiscal expansion; the worry with fiscal conservatism is you don't get anything done. Truth is we don’t really know much about what Burnham plans to do right now – he's pretty his hand close to his chest so far. The choice of Chancellor sets the tone for the regime shift – are we dealing with a significantly more left-leaning, higher tax-and-spend, higher borrowing type setup, or does Burnham play the continuity card, stick to the fiscal rules, etc. It looks like the latter. As stated before, this big-spending-vibes, lower-spending-commitments approach might be a positive for the markets but it’s not going to hold much water with his backbenchers. Still, it was enough to push GBPUSD to a two-month high above $1.35, while the pound is at its best level against the euro in a year. This is perhaps more about a sterling short squeeze as speculators were heavily short the pound running into July. But the macro story and Bank of England might get in the way of the sterling bulls before long, even if today's growth figures are solid.
The advantage of Burnham's approach in the short and medium term is selling the “big spending vibes” to the voting public whilst simultaneously selling the “small spending commitments” to the market. The risk in this approach is repeating the mistakes of the Starmer regime – big promises that are undeliverable, leading to disappointment and a loss of power, credibility and confidence. Fiscal constraints remain whoever is the PM/executive, doubt any new continuity candidate (no new manifesto/election) can do anything to boost growth in the near to medium term...looser fiscal policy would be punished by markets and think Burnham keen to avoid first 100 days headlines being driven by the markets. We may see some loosening at the edges but Burnham has been keen to dial down big spending promises that would require extra borrowing ... we get more of the same ...more disappointment but a Labour party that is feeling a bit better about beating Farage. The test will be if they start messing about with the fiscal rules to suit.
The advantage of Burnham's approach in the short and medium term is selling the “big spending vibes” to the voting public whilst simultaneously selling the “small spending commitments” to the market. The risk in this approach is repeating the mistakes of the Starmer regime – big promises that are undeliverable, leading to disappointment and a loss of power, credibility and confidence. Fiscal constraints remain whoever is the PM/executive, doubt any new continuity candidate (no new manifesto/election) can do anything to boost growth in the near to medium term...looser fiscal policy would be punished by markets and think Burnham keen to avoid first 100 days headlines being driven by the markets. We may see some loosening at the edges but Burnham has been keen to dial down big spending promises that would require extra borrowing ... we get more of the same ...more disappointment but a Labour party that is feeling a bit better about beating Farage. The test will be if they start messing about with the fiscal rules to suit.
The pound’s holding gains this morning with UK growth figures looking a shade more positive, with the +0.1% expansion in May in line with forecasts and the +0.7% growth in the three months to May a bit better than forecast. Monthly GDP figs are not worth much sweat, but the three-month ones are less volatile and indicate that Andy Burnham takes over an economy that is looking a bit more resilient than feared. Gilt yields just ticked up a notch - a more resilient economy is better able to withstand rate hikes I guess...though the labour market is the concern and is still very much in trouble. Oil prices are down a bit this morning although there is still plenty of risk around the Middle East – no significant escalation as yet though the risk is more about a low-level forever war meaning higher-for-longer energy prices, stickier inflation and stagflation which leaves central banks in a bit of bind. European stock indices are broadly lower this morning, with the majors all off –0.6% after eking out modest gains on Wednesday. Experian leads the FTSE 100 lower after a quarterly update while Rotork shares soared +66% after agreeing to a takeover.
Spenders vs vendors: Semis and hardware stocks sank, software and consumer electronics rose...the S&P 500 advanced +0.4% and the Nasdaq rose +0.6% ... wild swings in semis just seems to be the norm - every day we get these big upside moves in semis followed by a big downside move the next; rinse and repeat. Evidence the Kospi, as a proxy for semis and AI infrastructure, which was –6% lower today after a +6% gain the day before. The headline numbers are struggling to catch up - TSMC reported a +77% rise in profits, up over 23% from prior quarter. SpaceX fell below its IPO price. Apple rose more than 4% to a fresh record high.
Risk sentiment found further support as US producer price inflation unexpectedly slowed in June. Core PPI, excluding food and energy, rose 4.7% year-on-year, below the 5.1% consensus and down from 4.9% in May, while headline PPI slowed to 5.5% from 6.5%, also undershooting the 6.2% forecast. it indicates that the inflationary impact from the Iran war was not as bad as some feared and took down chances of an aggressive Federal Reserve response, providing some support for both risk assets and precious metals. Market implied odds for a rate hike in July fell to 10% from 17% the day before, already down sharply from about 44% the day before that post the CPI inflation report. Net the two inflation reports we have CPI running at 3.5% and PPI running at 4.7%...I fail to see how they can say that policy is appropriate at this level. As Warsh pointed out this week, inflation has been above target for 63 months.
Risk sentiment found further support as US producer price inflation unexpectedly slowed in June. Core PPI, excluding food and energy, rose 4.7% year-on-year, below the 5.1% consensus and down from 4.9% in May, while headline PPI slowed to 5.5% from 6.5%, also undershooting the 6.2% forecast. it indicates that the inflationary impact from the Iran war was not as bad as some feared and took down chances of an aggressive Federal Reserve response, providing some support for both risk assets and precious metals. Market implied odds for a rate hike in July fell to 10% from 17% the day before, already down sharply from about 44% the day before that post the CPI inflation report. Net the two inflation reports we have CPI running at 3.5% and PPI running at 4.7%...I fail to see how they can say that policy is appropriate at this level. As Warsh pointed out this week, inflation has been above target for 63 months.
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