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Week in review: Kicking the can down the road

The value of the UK currency is a good gauge of the mood of the nation, and the pound slumped to an 18-month low against the U.S. dollar on Monday, December 10. Prime Minister Theresa May’s spirits might well have been in a similar place.

Having negotiated a withdrawal agreement outlining how the UK would leave the European Union, Mrs. May’s “meaningful vote” on the document was scheduled for Tuesday. But with critics of the agreement from all sides of the house lining up to denounce the agreement, it became apparent that Mrs. May would lose. Her solution? Scrap the vote, and kick the Brexit can further down the road.

On Wednesday, the walls began closing in, with Conservative parliamentarians triggering a vote of no confidence. In the event, the prime minister survived the motion. But any improvement to the withdrawal agreement could be a forlorn hope in the face of repeated European Union (EU) assertions that this is the only deal on offer. In its present form, however, it stands little chance of receiving a Parliamentary rubber stamp. The business of the House for the coming week does not include a vote on the Brexit deal. Given that the Christmas recess begins next Thursday, there most likely will be no vote until January. The saga rumbles on…

Despite the uncertainties surrounding Brexit, the UK equity market was relatively resilient during the week of December 10. In the week to Thursday’s close, the UK broader-market FTSE 100 Index1 was up 1.47%. U.S. equity markets have been buffeted by trade tensions with China. While Chinese importers resumed buying U.S. soybeans, officials with the administration of President Donald Trump warned that Beijing will have to take further action to resolve the trade war. Over the week, the U.S. broader-market S&P 500 Index2 gained 0.66%. The European Central Bank (ECB) finally called a halt to its €2.6 trillion (roughly US$2.9 trillion) bond-buying program. The announcement was accompanied by gloomy remarks on Eurozone growth prospects from ECB President Mario Draghi, who said: “The balance of risks is moving to the downside.” The FTSE Europe (ex UK) Index3 was 1.24% higher for the week at Thursday’s close.

Unhappy New Year

Outsourcers have been under pressure–and no small measure of scrutiny–since the collapse earlier this year of Carillion, a government construction contractor which cost the UK government around £150 million (about US$189 million). Profits and share prices in the sector have tumbled in recent months. Interserve is the latest outsourcer to face difficulties. The heavily indebted company–which derives three-quarters of its £3.2 billion turnover from government contracts–confirmed that it was in rescue talks for the second time this year. That was bad news for shareholders, with 70% wiped off the share price as the news broke. But we think that it could get worse. The company aims to arrange a debt-for-equity swap that would mean a “material dilution for current Interserve shareholders.” How much of a dilution remains to be seen; final details will be released early next year.

Engines of growth

Rolls-Royce, the FTSE 100-listed multinational, said its annual profits would be at the high end of expectations, topping £450 million (approximately US$566 million). It wasn’t all good news, however. The world’s second-largest manufacturer of aircraft engines noted that the number of aircraft grounded for repairs to its Trent 1000 engine remained high, and remedial measures will cost more than £1 billion (roughly US$1.3 billion), as well as adversely affecting relations with airline customers. Rolls-Royce also said it was continuing to stockpile parts in the event of a “no-deal” Brexit. Investors were able to shrug off any bad news, focusing instead on the positive financial guidance, and share rose 4.8% to 819p on Wednesday, December 12.

And finally…

Amid the global economic and political turmoil, we think it’s good to see that politicians in Oklahoma are taking the bull by the horns and getting their teeth into meatier matters. A state senator is offering a rare opportunity to decide on a new state symbol. Casey Murdock has introduced a bill to name the ribeye as the official state steak. He pointed out that Oklahoma has 5.2 million head of cattle, and called for the state’s positive accomplishments to be recognized. “We get beat up on different issues; we’re last in education, we’re last in this and that, and we need to promote what is good in this state.” A job well done, we’d say.

If the bill passes, it will be the latest in a long line of offbeat U.S. state symbols. These include the official state exercise of Maryland (walking); the official state muffin of Minnesota (blueberry); the official state question of New Mexico (red or green?—referring to the residents’ choice of chile peppers) and the official state fish of Hawaii (Humuhumunukuapua’a).

 

1 The FTSE 100 Index is a market capitalization-weighted index of the 100 largest companies traded on the London Stock Exchange. Indexes are unmanaged and have been provided for comparison purposes only. No fees or expenses are reflected. You cannot invest directly in an index.

2 The S&P 500 Index is an unmanaged index considered representative of the U.S. stock market.

3 The FTSE Europe (ex UK) Index tracks the performance of large- and mid-cap stocks in developed markets in Europe, excluding the UK.

 

Important Information

Companies mentioned for illustrative purposes only and should not be taken as a recommendation to buy or sell any security. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list.

Fixed income securities are subject to certain risks including, but not limited to: interest rate (changes in interest rates may cause a decline in the market value of an investment), credit (changes in the financial condition of the issuer, borrower, counterparty, or underlying collateral), prepayment (debt issuers may repay or refinance their loans or obligations earlier than anticipated), call (some bonds allow the issuer to call a bond for redemption before it matures), and extension (principal repayments may not occur as quickly as anticipated, causing the expected maturity of a security to increase).

Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries. 

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