Macro Developments Impacting FTSE 100

Macro Developments Impacting FTSE 100

Investors Anxiously Wait for Trump-Xi Meeting

Leaders of the 20 biggest economies in the world will meet between June 28-29 for the latest G20 summit in Osaka, Japan to discuss a wide range of topics, with much of the talk leading up to the summit was about a meeting between US President Donald Trump and Chinese Premier Xi Jinping. Investors and pollical pundits are debating whether the two most powerful would be able to strike a deal to end or postpone the ongoing trade war, after a breakdown in talks last month. Investors were treading warily ahead of the summit on Friday with the UK blue-chip FTSE 100 index oscillating between gains and losses.

With each side blaming the other for negotiating in bad faith and then raising punitive tariffs on about half of exports of each other, the sidelines meeting between Donald Trump and Xi Jinping comes just weeks after talks to end their year-long trade war broke down in acrimonious circumstances. This will be the second time in seven months that the meeting will be overshadowed by the potential outcome of the much-awaited meeting. The pair agreed on a 90-day truce to their trade war when they last met at another G20 summit in Buenos Aires, and this has made some investors hopeful that another breakthrough could be reached in the latest meeting.

Ahead of the meeting, reports are emerging that another tentative trade truce could be struck in Osaka, putting the next round of US tariffs on more Chinese goods on hold. The South China Morning Post (SCMP), citing sources, said to allow trade talks to resume, a deal has been reportedly reached between the Trump administration and Beijing. However, it would not be that the trade war is over, but it would provide markets with some relief, especially the internationally focused FTSE 100 index. Though nerves on both the sides remain high, a higher ceiling for sentiment may have been enabled by the absence of confrontational rhetoric over the last fortnight ahead of G20 talks.

Neil Wilson, the chief market analyst at Markets.com, said that there is some hope that the meeting could result in a re-energising of talks following the breakdown in the recent discussions and a positive development that marks a shift in the rhetoric, the market does not expects the US and China to agree on a deal in Osaka.

Global markets generally are in a bit of a holding pattern ahead of the all-critical G20 meeting, and the meeting is likely to determine the next major move in equities as the G20 summit is at the forefront of traders’ minds. While both sides hope that they can at least restart formal trade negotiations after this weekend’s encounter between the two presidents, another bust-up is also possible if Mr Trump follows through on his earlier threat to impose tariffs on all Chinese exports to the US.

Neither side can afford to let the trade war go on for much longer as Mr Trump is heading into an election year and the Chinese economy is slowing, giving both an incentive to resolve the dispute at the earliest. While companies have urged Mr Trump to end the trade war, many businesses in the US approve of his hardline stance on China. With the International Monetary Fund and other prominent experts giving warning that the rapidly heightening trade dispute between the US and China is amongst the biggest risk to the growth of the world economy, the trade war is having an impact on global growth, and if a truce is announced, there will be relief from G20 nations too. The outcome of the meeting could very well set the course of the protracted trade war and thus could have the potential to impact the economic growth in the UK.

British finance minister Philip Hammond said that the country hopes that Trump and Xi can make progress on easing trade tensions and he was confident that a solution could be found. He said he hoped for an early solution to the tensions as the country is very vulnerable to anything that impacts on global trade and global economic growth because it is a very open, trading economy.

Mortgage Approvals Dips Slightly in May

The latest seasonally adjusted figures from the trade association of UK Finance showed on Wednesday that the extended Brexit deadline appears to have given housing market activity a boost, suggesting overall lending remained robust. British banks approved marginally fewer mortgages for house purchase in May than in the month before, but the figures showed surprising strength during the month, despite ongoing political uncertainty. Moreover, after a GBP 1.780 billion increase in April, net mortgage lending rose by GBP 1.364 billion.

The monthly reported mortgage approvals for house purchases by UK Finance showed that approval of mortgages fell back in May to 42,384, just slightly declining from 42,898 in April which had been the highest monthly total since February 2017. As compared to the time just before the extension of Brexit at the end of March, with 40,521 in March and 39,566 in February, mortgage approvals remained above those levels. While the figures eased back in May after a marked increase in April had taken them to their highest level in 26 months, on a non-seasonally adjusted basis, mortgage approvals were the highest since June 2016, the month the UK voted to leave the European Union in a referendum. However, in comparison to the long-run average rate of 50,838, they are still 16.6 per cent but were still modestly above the 38,000-40,000 range that has been seen since the last year.

Some economist said that while the latest monthly data reflect the ground realities, not too much emphasis should be given to one figure for just a month. The new realities of a softening market are still reluctantly recognised by some sellers even though there is more buyer activity. Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said that the record surprising strength despite increased economic and political uncertainty is not aptly reflected by the modest decline in mortgage approvals in May. Moreover, due to the tight labour market and low inflation, household real incomes look set to continue to rise.

As the wholesale funding costs of the banks have declined lately, this would translate into lower mortgage rates, further boosting the property market. The mortgage interest rates are still at historically low levels, employment has risen strongly recently and reached a record high in the three months to February, and consumers purchasing power has clearly picked up overall since mid-2018. Moreover, the Bank of England would only hike rates gradually and to a limited extent after 2019 and is expected to hold its policy rate through 2019. The May RICS housing market survey seemed the support this view as it reported that agreed sales declined for the 10th month but at the slowest rate since last December.

While the fact that approvals are approaching the seasonal norm must be encouraging news, it remains to be seen how many of these approvals turn into completions. Howard Archer, the chief economic advisor to the EY ITEM Club, said that the overall benefit of the avoidance of a disruptive Brexit at the end of March was limited, and support from improved consumer purchasing power and robust employment growth has shown some signs of levelling off. There are a number of recent surveys suggesting pay awards could be levelling off after recent improvement, and it is notable that real earnings growth moderated to 1.2 per cent in the three months to April from 1.4 per cent in March. Gain in employment at 34,000 in the three months to April was the slowest since last August 2018 and points out that employment growth has been slowing recently.

Fragile consumer confidence and relatively limited consumer purchasing power, despite recent improvement, has led to overall challenging conditions, which resulted in a constrained housing market for an extended period. After consumers faced a severe prolonged squeeze on purchasing power, consumer purchasing power is still relatively limited as compared to long-term norms, though it improved markedly between mid-2018 and early-2019. As a result, relative to earnings, house prices are currently stretched. According to the Halifax, the house price to earnings ratio was as high as 5.70 in May, well above the long-term (1983-2019) average of 4.28. From 5.40 in January, it rose to the highest level since November 2017 in February to 5.73. Although there has recently been a limited improvement, limited willingness to engage in significant transactions and fragile consumer confidence has also hampered the housing market activity. Moreover, the particularly poor performance in parts of the South East and London has dragged down the overall national picture.

While some temporary support was provided by delaying the disruptive Brexit, a prolonged uncertainty over the coming months could hold back the housing market. As house prices are relatively expensive relative to incomes, consumers might be particularly cautious about committing to buying a house. Due to a relatively lacklustre domestic economy, prolonged Brexit uncertainties and a challenging global environment, companies have been tailoring their behaviour which puts into question whether the labour market and earnings growth will sustain their recent strength.

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