elstonviews

- Growth rates cut compared to pre-referendum estimates - Inflation estimates raised on weaker sterling, but possibly not far enough - Focused spending on infrastructure and innovation is welcome Growth estimates cut UK GDP’s growth rate has been downgraded relative to pre-referendum expectations, with a cut from 2.2% to 1.4% for 2017E and from 2.1% to 1.7% for 2018E. Inflation estimates raised Following post-referendum sterling weakness, estimates for UK inflation were increased from 1.6% to 2.3% for 2017E and from 2.0% to 2.5% for 2018E.    This compares to 2.4% and 2.8% for 2017E and 2018E respectively for UK swap breakeven rates. Rising interest rate environment With higher inflation expectations there is upward pressure on Bank Rates after a protracted “lower for longer” regime. Spending focus: infrastructure and innovation   The government spending plans shows clearly defined cous – with budget to increase infrastructure spending fr

Trump looks set to become next US President Both pollsters and bookies called this totally wrong Asymmetric downside risk means near-term mark down of risk assets Voting results Trump swept to victory with 42 of 50 states declared, Trump leads Clinton 244 electoral votes to 215, with 26 to win, collecting 48.2% of the vote vs Clinton 47.1% (as at 0630 GMT today). The result with 46 of 50 states declared gives a Trump win of 278 electoral votes to 218, with 48.0% of the Vote vs Clinton 47.3% (as at Trump acceptance speech). Impact EQUITIES: expect US equities (NYSEARCA:SPX; LON:CSPX) and global equities (NYSEARCA:ACWI; LON:SSAC) to be volatile, with emerging markets (NYSEARCA:EEM; LON:IEEM) to be negatively impacted, particularly Mexico (NYSEARCA:EWW; LON:CMXC). From a sector perspective expect a positive reaction for financials (NYSEARCA:XLF; LON:SXLF), healthcare (NYSEARCA:XLV; LON:SXLV) and US infrastructure/utilities (NYSEARCA:XLU; LON:SXLU). BONDS: expect

Following the Brexit Referendum a private legal challenge was mounted against the Government. The challengers argued that Parliamentary approval (rather than prerogative power) was needed before Article 50 was triggered. A High Court ruling yesterday agreed with the Challengers, throwing the Brexit timetable and the viability of the current Cabinet into doubt. Who’s right? Given Referendums are only advisory in nature, and sovereignty rests with Parliament alone, the case had merit. And yesterday’s ruling in the High Court, the three ruling Judges agreed. The challengers maintain they are not contesting the referendum results, they just want legal process to be upheld.  Others suspect the campaign is partisan, but even if so, the case still deserves to be heard. Parliamentary approval was required on the way in to Europe.  It should be required on the way out. Rather than backing the down, the Government is taking the ruling to the Supreme Court in an

October saw a sharp one month loss for global sovereigns owing to inflation fears, raised interest rate expectations and declining Central Bank appetite for QE. In the US, prospects of a December Fed Rate hike saw 10 year yields clime 30bp on month and 76bp from summer lows to 1.26%, whilst stronger growth numbers raised inflation expectations and positive performance for TIPS. The USD performance for inflation-linked treasuries was -0.33% (LSE:ITPS), compared to for -1.32% (LON:IBTM) for conventional treasuries. In the EU, fears over the ECB’s commitment to QE contributed to the sell off.  The EUR performance for inflation-linked Euro government bonds (LSE:IBCI) was -1.78%, compared to for -2.14% for conventional Euro government bonds (LSE:IEGA). In the UK, the inflationary potential from Brexit, and vanishing expectations of any further BoE rate cuts on stronger economic growth led to a gilts sell off.  The GBP performance for inflation-linked gilts (LSE:INXG) was -0.65%, compa

Inflation The Bank of England has raised its 2017 inflation estimate to 2.7%, from the current rate of 1%.  The Bank does not expect inflation to return to its 2% target until 2020. The rise in inflation expectations was explained by the decline in the pound since the EU referendum, which is driving up prices of imported goods . Fig 1. Projections for UK CPI based on market interest rate expectations Source: http://www.bankofengland.co.uk/publications/Pages/inflationreport/2016/nov.aspx Growth The economic growth rate forecast was also raised from 0.8% to 1.4% for 2017, whilst expectations were cut for 2018 from 1.8% to 1.5%, signalling that the Brexit impact will be felt later than originally expected. Further interest rates considered in August have been clearly ruled out. Fig 2. Projections for UK GDP based on market interest rate expectations Source: http://www.bankofengland.co.uk/publications/Pages/inflationreport/2016/nov.aspx NOTICES: I/we have no positions

In Emerging Markets, when a new political regime comes to power by fair means or foul, they are often wise enough to keep the incumbent finance minister and central bank chief in place to ensure stable access to capital markets and to maintain international investor confidence.  The hardcore Brexiteers in the new cabinet got rid of the incumbent Chancellor and seemed to line up their sights on Britains’ suave Central Bank chief too.   While the UK is not an emerging market, after a shock as big as Brexit, the same rationale applies:  In a post-Brexit world, we need more, not less, certainty.  Thankfully that Carney held is head and non-resigned. NOTICES: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.  I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. This article has been written for a US and UK audience.  Tickers are shown for corresponding and/or