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Forty-nine years ago, almost to the day, in 1967, Britain was in the grips of a financial crisis. On 18th November, the British government devalued the pound from $2.80 to $2.40. Prime Minister Harold Wilson appeared on radio and television the following day to reassure the public and uttered his most famous line, ‘this does not mean, of course, that the pound here in Britain, in your pocket or purse, or in your bank, has been devalued’. Conservative MP and future Prime Minister Ted Heath said ‘That broadcast will long be remembered for that sentence’. ‘It will be remembered as the most dishonest statement ever made’.
Roll the clock forward to the present day and Britain has seen a greater devaluation than in 1967. How is the Government going to defend the pound? Understandably, the fall in Sterling following the EU referendum is expected to lead to higher inflation in 2017 meaning that the pound in your pocket might not go quite so far as it did previously. However, did you know that some of the pound coins in your pocket could actually be worthless? This is because the Royal Mint estimates that as many as one in thirty pound coins currently in circulation is fake.
The Royal Mint has therefore designed a new 12-sided pound coin that will be harder to counterfeit as it will incorporate a hidden high security feature. Some 1.5 billion new coins will be minted.
The introduction of the new 12-sided pound coin means that businesses will need to upgrade their cash handling equipment. All machines accepting cash such as vending machines or rail ticket and car parking machines will need to be able to accept the new coins as well as the old pound coins which, by Autumn 2017, will cease to be legal tender.
The new 12-sided pound coin will enter circulation in March 2017. Whether this is to commemorate the implementation of Article 50 and the start of the formal Brexit process or not we will let you decide!
What have we been watching?
Pretty much the same trends as the previous week with the US Dollar firm against a wide basket of currencies and bond yields on the rise around the world, hence movements across all asset classes continued in a similar vein, with emerging market currencies and gold still under the greatest pressure. The overwhelming focus is still very much on all things President-elect Trump with concerns that his commitment to economic stimulus will herald faster growth but also the return of inflation. The rise in bond yields also reflects the expected shift globally from central bank monetary stimulus to government fiscal stimulus with infrastructure investment. The US interest rate futures market is now pricing in a 98% chance of a rate hike by the Fed in December following strong US retail sales data. The US Dollar hit a 14- year high on a trade-weighted basis.
There was one interesting development by a central bank in response to the global bond sell-off. The Bank of Japan announced it was to commence buying an unlimited sum of bonds at a fixed rate after Japanese 10-year bond yields turned positive. If the Bank of Japan is serious about keeping Japanese bond yields at zero, in the face of rising global bond yields, then does this mean we now have ‘helicopter money’ printed in Japan effectively being dropped over the US? Donald Trump might welcome this move by a central bank, even if it is not the US Fed, that cushions the rise in global bond yields given the massive US fiscal boost he has proposed. However, besides borrowing more money, US press reports suggest Trump is also exploring ways to establish an ‘infrastructure bank’ to fund planned US infrastructure investments.
One interesting statistic we picked up during a meeting with a US fund manager last week demonstrates how tricky it is working out Trump’s game plan. Apparently, the level of unemployment in the US construction industry is only 5%. So, where is the US going to get enough skilled construction workers to start re-building the roads, bridges and airports? Surely not from Mexico?
After all the US election news, thoughts in the UK turned once more to Brexit. The FT reported that the EU’s Brexit negotiators are pushing for a draft UK exit deal by mid-2018 as part of a narrow, divorce-first negotiating approach. The negotiators would demand an exit bill of between 40bn-60bn euros to cover unpaid budget commitments, pension liabilities, loan guarantees and spending on UK-based projects! Germany’s finance minister also set out a tough line for talks saying that even after Brexit, the UK would be bound by tax rules that would restrict it from granting incentives to keep investors in this country and would face EU budget bills for more than a decade. In the meantime, Theresa May is preparing to railroad a short bill through parliament authorising her to trigger Brexit in case the government loses an appeal to the Supreme Court in December.
Later this week, new Chancellor Phillip Hammond is expected to admit to the largest deterioration in the UK’s public finances since 2011 in the Autumn Statement. The official forecast is expected to show a £100bn bill for Brexit within five years as slower growth and lower than expected investment adversely impacts tax revenue.
UK headline inflation dipped a little as un-seasonally mild weather hit clothing sales. This masked a 2% increase in factory gate prices due to weak Sterling suggesting inflationary pressures are likely to build going forward. The latest backward-looking UK jobs data was fine but did include some signs that Brexit-related concern might be creeping into the jobs market. Claimant count unemployment rose in October while September’s estimate was revised upwards. Earnings growth was steady at +2.3% but the squeeze on real earnings is likely to intensify as inflation picks up into 2017. In the meantime, UK consumers took advantage of low interest rates to shop with October retail sales in October at a 14- year high. Colder weather helped clothing sales while supermarkets benefited from seasonal Halloween purchases.
The Eurozone economy continues to make steady if unspectacular progress as Q3 GDP expanded at +0.3%, in line with the earlier ‘flash’ estimate and at a similar pace to Q2. The minutes of the latest ECB meeting reflected ongoing concern over the undershoot in inflation and subdued wage growth. The decision over whether to extend the current asset purchase plans will be taken at next month’s meeting.
In the USA, October retail sales beat expectations at +0.8% while September sales were also revised upwards from +0.6% to +1%. Fed Chair, Janet Yellen referred to a US interest rate hike being justified ‘relatively soon’. Stronger than expected inflation data for October would seem to support this view.
Oil rallied slightly on renewed optimism that OPEC could deliver on proposed production cuts at its next meeting at the end of this month following comments from Saudi Arabia’s energy minister. In the USA, the shale oil industry was given a boost on suggestions that Harold Hamm, could be appointed as energy secretary by Donald Trump. He would be the first energy minister drawn directly from the US oil industry.
Finally, talking changes in money. India recently scrapped 1000 and 500 rupee bank notes in a surprise move as part of a tax evasion and corruption crackdown. The switch caused chaos for tens of millions of Indians queuing for hours to exchange and withdraw cash. India’s government and banks were ill-prepared for the ban which suddenly put 86% of the country’s money supply out of circulation!
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This publication is for informational purposes only and should not be relied upon. The opinions expressed here represent analysis by an Alpha Portfolio Management representative at the time of preparation and should not be interpreted as investment advice.
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