This site uses cookies for better functionality. Close this notification to go ahead, or read more about our cookie policy.

close
LGT Vestra US

CIO Question Time - Strengthening euro and May's support request - Sep 2017

Jonathan Marriott – Chief Investment Officer, LGT Vestra LLP

Is the rise in the value of the euro a constraint on the European Central Bank’s ability to remove its stimulus?

At Sintra in June, Mario Draghi hinted that the European Central Bank (“ECB”) would be ready to start removing its stimulus measures later this year. At this week’s ECB meeting rates were left unchanged and there was no talk of reducing the stimulus yet. It has been said that interest rates will stay low for an extended period and that the €60 billion of bond buying per month will continue to December. With the European economy looking stronger, the euro has risen this year, particularly following the Sintra speech, and is currently up 13% year to date. However, inflation has remained stubbornly low and the rise in the currency helps reduce import prices and makes exports less competitive. The ECB has a 2% inflation target and has had to revise its inflation forecast down following the currency move. In Draghi’s comments after the ECB meeting he expressed that their expectations and actions were impacted by the currency strength.

The US Federal Reserve has a broad mandate to maintain economic stability, full employment and inflation. If this was the ECB mandate there could be a better chance of a rate rise but with just an inflation target, they may have to hold back for some time to come. Thus, the currency is constraining ECB action and delaying any moves to tighten interest rates.

Theresa May has asked Britain’s biggest companies to back her stance on Brexit, what are your thoughts?

Sky News is reporting that Downing Street has asked the leaders of Britain’s leading companies to sign a letter supporting the government’s position on Brexit. I have not seen the full text of the letter but it is said to have annoyed some of its recipients. During the Brexit campaign, such letters were used by both sides to boost their standing. If this letter was sent out indiscriminately then it is no surprise that some are less than impressed. This morning, The Daily Telegraph is reporting that 40 of her own MPs are pushing for a clean Brexit with no attempt to keep the UK in the EU by “stealth” during a transition period. Meaning that, with her own party split it was a long shot that she would get support for a transition period with ongoing payments to the EU.

The EU negotiators are complaining that the UK is not paying enough attention to the issues at hand, meanwhile the UK are complaining that the EU will not talk about the future relationship until the divorce bill, Irish border and rights of EU citizens is sorted. The EU negotiators have been given a mandate which is incompatible with what the UK counterparts want. As with all EU negotiations they will go to midnight on the last day and beyond before a final deal is done. The reality is that we do not know what can be achieved and in the meantime the government is trying to pass a single bill to facilitate the replacement of all EU legislations. Following the election, Mrs May has had to get the backing of the DUP to get a majority and they want a softer form of Brexit to keep the Irish border open. A soft Brexit is harder to negotiate than a hard Brexit. As with the Brexit referendum, there are extreme views on both sides and no one is likely to be entirely content.

Many employers need to recruit overseas. The unemployment rate in the UK is only 4.4% which is close to full employment. Another leak this week talked about restrictions on migration after Brexit particularly in the unskilled sector. Can employers blithely sign up to backing the government stance? While I am sure some will, others will say that they just don’t have enough information and business concerns have not been addressed. Some will say a transitory period is risking a stealth continuation of EU membership, whilst others would want exactly that. Given the polarity of views I suspect that there are only few that will be happy enough to sign.

 

 

 

This communication is provided for information purposes only. The information presented herein provides a general update on market conditions and is not intended and should not be construed as an offer, invitation, solicitation or recommendation to buy or sell any specific investment or participate in any investment (or other) strategy. Past performance is not an indication of future performance and the value of investments and the income derived from them may fluctuate and you may not receive back the amount you originally invest. Although this document has been prepared on the basis of information we believe to be reliable, LGT Vestra LLP gives no representation or warranty in relation to the accuracy or completeness of the information presented herein. The information presented herein does not provide sufficient information on which to make an informed investment decision. No liability is accepted whatsoever by LGT Vestra LLP, employees and associated companies for any direct or consequential loss arising from this document.

LGT Vestra LLP is authorised and regulated by the Financial Conduct Authority (FCA).