Each week I’ll be taking a look at the biggest stories from the weekend to see how they could impact the start of the week’s trading action. This weekend one story dominated: UK PM Theresa May told the Conservative Party Conference that Article 50 will be triggered no later than March 2017, which would see the UK leave the European Union in 2019.
Brexit means March 2017…
May’s announcement was something of a shock, largely because her government has been scant on detail about what Brexit actually means. In fairness, she still didn’t give any detail on how we will negotiate our exit and what a post-EU UK economy will look like. While she suggested that the UK would shift away from the single European market, she did not mention what it will be replaced with, or how the UK will negotiate new trade deals with Europe and the rest of the world.
May’s speech seems to suggest that the UK’s prime minister is content with winning back the UK’s “sovereignty” at the cost of a period of economic disruption, which is likely to be negative for the pound. While sustained pound weakness may be less fierce than it has been in recent months – sterling had its worst quarterly performance between June and September since 1984 - we continue to think that the balance of Brexit talk remains bearish for the pound, and sterling could remain unloved into the end of this year.
Still no resolution for Deutsche Bank (DE:DBKGn)
Even though the German bank saw its share price stage a recovery on Friday, Deutsche remains in rough waters. The German bank had no formal resolution to its woes over the weekend. Its capital levels remain a concern after the US Department of Justice slapped a $14bn fine on the bank. DB’s head honchos are heading to the US this week for the IMF and World Bank meetings, we expect frantic negotiations on the sidelines between Germany and the US authorities. We will be looking out for a deal to be reached that could dramatically reduce the initial $14bn fine. If this occurs then we could see a sharp recovery in DB’s share price, although the bank is still likely to come under pressure to rebuild its capital buffers, which could limit any potential upside. However, if no deal were forthcoming then we would expect further selling pressure on DB shares, which could eventually force the German authorities to step in and save its biggest bank.
Is RBS (LON:RBS) on the DOJ’s chopping block?
The Sunday Times reported that RBS could be next inline for a mega fine from the US Department of Justice, to the tune of $10bn. If that turns out to be the case then the UK taxpayer is on the hook for the bill, since we own more than 70% of the bank. German industry heads have said that the US authorities are waging economic war on European banks, while these fines are enormous, the biggest hindrance to European banking right now is much closer to home: negative interest rates by the ECB, which is eroding the banks’ profitability, the US DOJ fines feel more like another nail in the coffin for Europe’s investment banking industry.
Tech stocks boost the S&P 500
It was a roaring 3 months’ for US tech stocks, which outperformed the overall S&P 500 by 9% last quarter. Whether or not the performance of tech and the overall US indices can continue will depend on a few factors: 1, Q3 earnings season which starts next week, in particular, forward guidance for 2017; 2, continued woes for European banks, which makes their US counterparts a more attractive investing opportunity in Q4; and 3, the Fed managing to raise interest rates without spooking the markets or disrupting the fragile economic recovery.
We expect to remain dependent on the minutia of central bank policy for some quarters yet. A strong payrolls number this Friday could see the dollar surge as already high expectations for a December rate rise from the Fed -market expectations are already above 50%- could rise even higher, which may curb investors’ enthusiasm for a year-end rally in stocks.
PS, This is my first official post back from my maternity leave. Please excuse me if I am a little rusty as I try to remember what it is I do for a living. At least some things don’t change. The Fed still doesn’t have the guts to raise interest rates, and the banks remain up the creek without a paddle. One thing I didn’t expect to contend with was pricing in the prospect of a Trump Presidency let the US election fun and games begin!
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