FTSE Forecast; Brexit Supports, World Economy Undermines

It is that time of the month when we ritually kick ourselves for making what turned out to be a stupid forecast six months ago – and then, without learning from our mistakes – we go on to make a crazy forecast for where FTSE will be in another half year.

Will go up, will go down, but not necessarily in that order

BUT this time, we weren’t so far wrong. Back on 15 April, we had failed to leave the EU on the second deadline, and a new exit-date of 31 October had been decreed. Wisely, or perhaps by luck, we guessed that on 15 October, Brexit might not be established, or the future might be rather worrying. Quote “So we will work on the basis that Brexit is still on-going by October.

Our forecast for 15 October was 7600, quite a reduction from the 8150 we had been predicting for September. Thus, we got the direction right, and a close of 7212 is pretty accurate by our standards.

The Next Six Months

Now for the next six months. British politics are somewhat unpredictable. We think that Boris might just pull it off and squeeze Brexit through tomorrow. The country (or at least 52%) will rejoice….. so there is no way the opposition will allow an election if Brexit goes ahead. Thus our central forecast is that Brexit happens, but then the minority government struggles on for several months until the demand for an election is overwhelming. This could easily be around our forecast date of 15 April 2020. However, a Brexit Deal will create an optimism and gentle release of pent up demand to support the UK economy over the next six months.  Lack of Government interference with new laws will also help!

However, no country is an island. Okay, well some countries are islands. Malta comes to mind. But economically, the future of UK based businesses, with our new, outward looking trade policy, cannot be but affected by the world economy. We foresaw the potential of a recession by year end, and the data published since then has done nothing to change that view. The global economy, from US to China to EU (in that order) is definitely looking soft.

Where does that leave us?

The UK domestic economy should have a surge, this will be countered by weak global growth.

Re-rating

The UK stockmarket, is at rather low multiples of income, given the interest rate environment. This morning, www.dividenddata.co.uk quotes the FTSE100 yield at 4.53%. If / When Brexit is settled, we see scope for yield compression – and hence price rises – justified by the reduced uncertainty and risk.

In summary, we think UK growth will be supportive, global economics will undermine, but an extra boost will be given by removal of the Brexit factor. From a close yesterday of 7182, we see FTSE100 at 7600 on 15 April. This is an increase from the 7200 we expected for Jan – Mar next year.

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A Bleak-Midwinter Brexit Recession By Christmas

Oo-er, suddenly the UK economy ain’t looking so good!

The news media are full of speculation about Brexit, and not many of the stories are looking forward to how wonderful the country will be once/if Brexit happens. We can expect more of the same for the next twelve weeks until Halloween.

Are we heading for No-Deal?

At the moment, both sides are digging in, trying to create a tough stance for the benefit of their populations (I hesitate to use the word electors when we are discussing the EU, but you know what I mean). Behind the scenes, it can be assumed that the diplomats and civil servants will see themselves as the grown-ups in the room, and thus be at least looking for common ground.

However, it seems unlikely that a comprehensive new Withdrawal Agreement will be crafted by October. But we can expect enough co-operation to keep the world turning.

So what’s the problem?

The problem is that investment is collapsing. The worst thing for businesses in uncertainty. Life has enough risks when it comes to business investment, without an unseeable future being only 12 weeks away. Similarly, house-buying and car buying are likely to miss out on their usual autumn surges this year.

And after Brexit day, will there suddenly be clarity and light? Nope. There will be hysteria in the media for a few weeks as every little shortage and business malady is blamed on you-know-what. And the effect of this – more hand-sitting and less spending.

What else is happening?

Leader of the Free World

The US is starting to suffer from Mr Trump’s tariffs, to the extent that Jerome Powell has cut interest rates despite full employment. Meanwhile, China is suffering a marked slowdown from the trade war. This has now spread to Europe, which is also teetering on the edge of recession.

Conclusion

The UK is heading for recession – and it is difficult to see when it could end. Domestically, we’ll probably pull out next spring…. but that depends on what the rest of the global economy does. If things keep softening elsewhere, it could be a big one!

PS. The slowdown in Q2 announced today was no surprise, given the stockpiling in Q1 for the original Brexit day, and the factory shutdowns brought forward to April in case of Brexit delays.

Theresa the Timid

PPS. The coming recession will be a direct result of Mrs May’s and Parliament’s timidity over Brexit. If they had gone ahead on 29 March, we’d be pulling out of it by now. The delay to October has just increased the uncertainty and halted the economy for 7 months, tipping us into a recession we need never have had.

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It is Pound’s Thrilling and Tense Time. GBP to Rise Whatever Brexit We Get

What is happening to sterling? You’d think it would be thrashing around like an angry hornet stuck in a beehive hairdo.

EURGBP remains calm
GBPUSD Remains Calm

But it remains calm , as has done since last autumn. Under normal circumstances, GBP acts like a divorce-child, torn between Europe and the US. Sometimes it goes with the Euro, on other occasions it sticks with the US Dollar. And very infrequently, enough happens in UK for it to make a simultaneous move against both its “parents”.

So what is happening now? Are currency traders;-

a) woefully short-sighted and not interested in Brexit, as it won’t happen today or tomorrow?

b) utterly complacent about Brexit and not factoring it in the price at all?

c) estimating that the percentage chance of No-deal has not changed, and so the effect on GBP has not altered?

But here is a little heads-up!

Currencies do move on matters other than Brexit. Hard to believe isn’t it, but there are a whole range of different inputs into a currency price? You know, GBP did move up and down before Brexit – and it will continue to trade after Brexit has either died or been settled.

Since our last currency forecast on 5 February, “Cable To Go Higher On Brexit”, the Brexit debate has moved on a little, in that it now appears to be more binary – No Deal or No Brexit. More on this tomorrow (sorry).

The world economy has slowed too. US Non-Farm Payrolls (our fave number) were weak in February. Europe looks weak too, with German industry catching a cold from China. Let’s hope that doesn’t become Asian ‘Flu. Meanwhile, the UK economy continues to trundle along with record employment and flaccid inflation. Suddenly, that isn’t looking too bad.

Interest rate rises seem to be off the board in all main economies, with the chance of more QT in the Euro Zone.

So to the forecasts.

a) No-Deal Brexit is probably 20% in the price of GBP already. If it happens, then watch out for some weakness against USD in the short term, but strength once the media-highlighted logistics problems are resolved, the strong UK fundamentals come into play.

We see GBPUSD at 1.2800 in a month and at 1.4200 in 6 months under this scenario.

Against the EU, we think No Deal is nearly as bad as for Europe, and so the EUR will maintain its level with GBP on a one-month basis at 0.8600. Over 6 months, we seen GBP stronger against EUR, with EURGBP at 0.8200 in September.

b) No-Brexit (aka Long Delay) then we see the same forecast levels in 6 months (driven by fundamentals), of GBPUSD at 1.4200 and EURGBP at 0.8200, but with a step up (provoked by guess what) rather than a dip in the meantime.

 

PS. Well done if you liked our pounds shillings and pence pun in the title. No prizes for spotting it though.

Money!
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