Barclays Markets Weekly 12th July

Week ahead

News will pick up pace next week on the micro side with the start of the second-quarter earnings season. But key macro data remain on investors’ watch list.

Chinese second-quarter gross domestic product and June’s industrial output and retail sales data are all out next week. Despite the G20 truce in June, headwinds to the Chinese economy persist as already levied tariffs remained in place. The data will show how much those are weighing on manufacturing activity and supply chains.

The US economy continued to show resilience after solid June payrolls. But downside risks could be exacerbated by weak business activity from June’s industrial production readings. June retail sales will indicate consumer strength, after rising in May. The housing market shows signs of cooling but June’s housing starts should stabilise amid lower borrowing costs.

The eurozone has a lighter schedule ahead. Germany’s July ZEW Economic Sentiment will be closely monitored for signs of lingering woes in Europe’s largest economy. June’s final harmonised indices of consumer prices for the region is expected to stay low at 1.2%, adding to pressure for a European Central Bank rate cut despite the steady increase in services prices.

Similar services inflation dynamics persist in the UK, where investors await consumer price inflation for June after it declined in May due to lower energy prices. June’s UK retail sales and UK labour market data for May are also on the radar. The International Labour Organization unemployment rate and average weekly earnings growth will likely disappoint after holding up in April. Most second-quarter data in the UK will be weak, as companies anticipated a Brexit at the end of March and brought forward activity to avoid any short-term disruption.

Chart of the week

Only sterling sunshine when “no deal” goes

As investors look to avoid trade tensions and sanctions coming across the Atlantic, there is little harmony in a divided, Brexit impacted, UK. This stems from the likelihood of Boris Johnson taking the helm at 10 Downing Street in a few weeks. He plans to leave the EU on 31 October “come what may”.

The betting market is priced for a close to 30% chance of a no-deal Brexit and cannot even take solace from the other leadership candidate, Jeremy Hunt, who is increasingly following the same rhetoric.

The result has been painful for sterling. The currency fell as much as 40 basis points on 9 July to 1.246 against the US dollar – the currency’s lowest point since April 2017. The prospect of a Bank of England rate cut in the event of a no-deal or deteriorating economic conditions provides even less support for sterling.

The Brexit uncertainty has already made its mark, with second-quarter output expected to contract. A no-deal departure from the EU, according to rating agency Moody’s, would spark a UK recession and not be the best outcome for the EU. For these reasons, we believe a resolution to the Brexit standoff is likely by the end of 2019.

Investors can expect volatility in sterling over most of 2019 and positioning should be managed accordingly to withstand it. Heightened volatility would have implications for equity markets. Although a weak sterling should benefit UK-listed multinationals with substantial overseas revenues, that report earnings in the home currency, we believe investors should remain selective in their UK equity exposure.