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‘Rhetoric aside…’

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Plato is credited with saying that “rhetoric is the art of ruling the minds of men” – something to be mindful of, after a week that was suffocated with little more – much of which falls outside the scope of this article.
 
In the US, under a bizarre admission of using ‘alt-facts’ and support for torture, the job of ‘making America great again’ got underway. Meanwhile, news emerged that GDP growth of 1.6% in 2016 was the lowest in five years, having been 2.6% in 2015. However, even these worrying data did little to impede the market’s confidence in Trump delivering on his promises of tax cuts, higher infrastructure spending, and easing of business regulation that will, in turn, drive economic growth. As a result, the ten-year US treasury, which was trading at 1.86% on election day in November, closed the week at 2.49% on expectations of higher prices and tighter monetary policy.
 
In fact, the Trump administration seized upon the weak GDP figures as further evidence that America was doing poorly out of existing global trade agreements, and used this as further justification for the President’s order to pull out of the Trans-Pacific Partnership (TPP), an agreement to knit together the economies of Asia and America. Not content with this, the Trump administration reaffirmed its commitment to renegotiating the North American Free Trade Agreement (NAFTA). Whilst a protectionist tone was one of the few consistencies of Trump’s campaign, there are worrying signs that he is unable to separate trade policies from geopolitical concerns - as evidenced by his threats of 20% import taxes on Mexican goods to fund the proposed border wall.
 
Such rhetoric might simply be an act of throwing red meat to his support base; however it does seem to reflect a worrying naivety given that over 50% of exports rely on global supply chains which require at least two border crossings before consumption. Any trade wars would be to the detriment of the US economy, the consumer, and US trading partners. Whilst the markets remain relaxed that Congress will moderate any legislation, we cautiously remind readers of the global panic that swept the markets twelve months ago when Chinese (and therefore global) economic growth appeared to be slowing. It may not take much weak economic data for sentiment to change once again.
 
Events in the US could have been seen as a welcome distraction for Theresa May, whose government lost a Supreme Court ruling on the triggering of Article 50. Whilst this came as no surprise to anyone, including the government, talk that such a verdict is immaterial may be a little overdone. While not iron-cast, it is widely understood that the triggering of Article 50 is inevitable, and any parliamentary vote on the eventual deal will hold little weight when faced with the alternative of no deal. The government, therefore, may face a harder time getting legislation on triggering Article 50 through both houses by their self-imposed timetable without agreeing to amendments that would give Parliament greater scrutiny to hold the government to account. Expect any prospect of greater accountability to be welcomed by the markets, as was the case this week when the government agreed to publish a white paper on its approach to Brexit.
 
These events added to the importance of the Prime Minister’s visit to the US where she was looking to renew the special relationship and secure a commitment for a free trade agreement to take effect soon after the UK leaves the EU. While the messages from Washington were positive, if somewhat inconsistent with trade rhetoric elsewhere, we will wait and see the results whilst raising a cautionary note. Trump’s preference for bilateral trade deals over regional ones is possibly born of the fact that size matters and, therefore, bilateral deals give the US the upper hand. If this is the case then the special relationship might well be put to the test. However, we take comfort from the news over the weekend that a £100m defence contract with Turkey, a country that was subject to much negative press during the referendum campaign, "…underlines once again that Britain is a great, global, trading nation”.
 
Friday’s positive GDP growth for Q4 of 0.6%, which saw the five-year swap reach 0.94%, should be followed this week by the MPC upgrading economic growth forecasts and lowering inflation expectations. While we do not expect any change in monetary policy on Thursday, we expect the market to closely scrutinise the inflationary report: expect volatility.
 
Eurozone economic data over the last week, including consumer sentiment measures, would suggest a positive start to 2017. As a result, we expect positive GDP figures of 0.4% and unemployment figures of 9.7% to be released on Tuesday. Whilst geopolitical risk continues to be a prevalent and potential drag on investment, the ECB released welcome data this week demonstrating that loans to eurozone companies grew at the fastest rate in over four years in December. This will support expectations that the ECB will reduce the number of bond purchases it makes from March onwards. However, one source of debt in the securitisation market remains challenging with only €96bn of securitisations in 2016. Whilst up from €83bn in 2015, this remains dreadfully below the €400bn done in 2007.
 
On a separate note, we look forward to hosting our annual Real Estate breakfast on Thursday morning in London, where we will be discussing the real estate debt markets and ongoing foreign exchange volatility. Please email events@jcrauk.com for details if you wish to attend.

All views expressed here are the author’s own and are based on information available at the time of writing.


 

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