Weekly outlook: Tory leader decided; ECB policy decision; US GDP

The key events for UK wealth managers for the week starting 22 July

Monday 22 July

– Tory leadership contest draws to a close and the next prime minister is declared

Boris Johnson remains the undisputed frontrunner to take over for Theresa May. The odds of Johnson winning the race are currently 1/25 while bookies have his opponent Jeremy Hunt at 12/1 odds.

Psigma Investment Management head of investment strategy Rory McPherson expects the pound to get a short-term boost if Johnson emerges victorious given the former London mayor has been outspokenly adamant that he will be able to get the UK out of the European Union by 31 October. But McPherson believes a stronger pound will be short lived as soon as the fizz goes away and markets go back to realising that Johnson’s Brexit timeline probably can’t be done.

Tuesday 23 July

– Japanese inflation data

– In Europe, quarterly results from UBS and Banco Santander

Wednesday 24 July

– Glaxosmithkline and ITV publish interim results

– US PMI data

– Eurozone PMI data

“Europe has lost significant momentum in economic growth over the past 18 months,” noted Canaccord Genuity Wealth Management investment manager Sam Buckingham.

“There are, however, signs that the deceleration has troughed, with recent GDP growth picking up from its lows. Wednesday, we receive a first look at the bloc’s PMIs for July to provide further insight into whether the recent pickup can continue. Consensus forecasts are for the Markit Eurozone Manufacturing PMI to rise to 47.8, remaining in contractionary territory, while the corresponding services PMI is forecast to fall to 53.5.

“Having said that, positive news should be taken with a pinch of salt as investors keep an eye on whether US president Donald Trump will turn his attentions to Europe after he’s done with China. It is widely expected he will implement tariffs on key European exports, such as autos.”

Thursday 25 July

– Relx, Unilever, Anglo American and Astrazeneca report

– ECB policy decision

IG senior market analyst Joshua Mahony said at this stage the current ECB outlook is a “bit of a coin toss”. While markets are pricing in a 100% chance that the Fed will cut rates later this month, there’s only a 43% implied probability the ECB will bring interest rates below zero this week. Mahony said Draghi’s decision could be swayed by the host of PMI surveys out the day before on 24 July.

AJ Bell investment director Russ Mould said bond and stock markets will be “pretty stunned” if Draghi does nothing between now and his departure in autumn when he will be replaced by IMF boss Christine Lagarde.

In addition to cutting the headline refinancing interest rate from zero where it has been stubbornly stuck since March 2016 or slicing the deposit rate currently at -0.4%, Mould said Draghi could sanction a resumption of QE barely eight months after the ECB stopped adding to its €2.5trn-plus corporate and government bond buying programme.

However, he noted that there are some potential problems with this last plan, namely the scarcity of good quality German paper and the limit on the ECB to buying no more than a third of any issue. But Mould said there’s nothing to suggest the rules can’t be carefully bent or rewritten once again.

Friday 26 July

– US Q2 GDP figures

Buckingham points out that much like the rest of the world the US economy has also lost momentum which he said is unsurprising given the impact of Trump’s tax cuts is diminishing.

He said current forecasts are for a substantial drop in the GDP annualised quarter on quarter reading from 3.1% to 1.7% in Q2.

“Friday’s US Q2 GDP figure will be another critical event of note, with market expectations of a 50 basis point cut providing the biggest driver for the dollar over recent weeks,” added IG’s Mahony. “Currently priced at 33.5%, the recent comments from Fed governor Jerome Powell have seen expectations of a double rate cut (50bps) ramped up. Q1 GDP manged to break the negative trend following two-months of deteriorating growth rate. With the past three-quarters overshooting market expectations, another outperformance could completely shift the interest rate expectations for the next six-months.”

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