Are currency markets living in a different galaxy, as they say in Brussels? A single dinner at Downing Street has provoked verbal warfare between Theresa May and her EU negotiating partners-cum-foes, seemingly increasing the chances of a hard Brexit that almost everybody agrees would be bad news for the pound. Meanwhile, we learned last week that growth in the UK economy slowed sharply in the first three months of this year as inflation started to bite. So sterling ought to be falling, or at least wobbling, right?
It’s not. The pound shot up from $1.25 to $1.28 after the prime minister called the general election a fortnight ago and has barely moved since. At $1.29 on Thursday, it remains the best-performing major currency against the dollar in the past month.
Does this make sense? Actually, it probably does, for three reasons. First, the UK economic data is mixed, rather than outright poor, at least on a short-term view. The services sector, which is about 76% of the economy, enjoyed its fastest growth for four months in April, according to surveys. For firms that export their services, it seems the benefit from last year’s post-referendum fall in the pound from $1.50 is arriving. That is reassuring, even if digesting the accompanying inflation will be painful.
Second, if one is measuring the pound’s progress against the dollar, events in the US matter. The US economy also slowed in the first quarter, taking the wind out of theory that the Federal Reserve would raise interest rates four times this year. It could be only two increases, which dampens the appeal of US assets.
Third, the market’s big shrug over the May/Juncker bust-up is hardly perverse. The negotiations haven’t yet started, and argy-bargy during the warm-up may be a poor guide to what follows. The general market view is that a bigger Tory majority – the expected outcome – would give May greater freedom to ignore the Brexit hardliners in her party and thus avoid a “cliff-edge” exit. That line of reasoning is not universally shared and may turn out to be spectacularly wrong. But advocates won’t be deflected by the fallout from a dinner. They’ll reassess whether signs of compromise are still absent in the autumn.
In the meantime, strange as it may seem, the parade of City strategists predicting that the pound will soon be trading above $1.30 may be right. Selling sterling was an easy bet last year – it’s trickier if the short-term economic data now matters again.
Retail reasons not to be cheerful
The retail industry, note, is not covered by the PMI services report mentioned above. The news from the world of shopping is less cheerful, to judge by Next’s latest update. Sales fell 2.5% in the three months to the end of April and the company sliced £40m off its most optimistic estimate of profits for the full-year. The range is now £680m to £740m, meaning a drop of somewhere between 14% and 6%.
Shares fell 5%, but you have to wonder why the City expected chief executive Lord Wolfson to be less gloomy that he was in his last outing in March. Nothing has happened since then to alter “challenging” retailing conditions, especially if you’re selling food or clothes. If there has been a change, it’s only the one Wolfson noted: “Real wage growth is now close to zero.”
That doesn’t need to be a catastrophe for Next’s investors. The company is still pumping out cash and the second of this year’s semi-guaranteed special dividends of 45p is now nailed down. Barring a really serious downturn, there should also be a same-again ordinary dividend of 158p, which equates a yield of 3.8% before one counts the specials.
That is the possible appeal of Next shares: you’re being paid to be patient until the trading weather improves and the company corrects last year’s fashion cock-ups. But the patience part is important. With honourable exceptions, mostly in the online-only field, retailers are in buckle-down mode.
Opec has lost its energy
The problem with Opec’s attempt to impose higher oil prices on the world was always obvious: if the production curbs didn’t produce instant results, the market would want to know if bigger and stronger action would follow.
An answer of sorts is now emerging: the cartel, plus Russia and a few other non-members, may be able to agree to extend curbs beyond June – but deeper cuts currently look impossible. Too many countries need the revenues.
Thus the price of a barrel of crude fell below $50 on Thursday, its lowest level since November. Opec’s exercise was aimed at creating $60. In the face of booming US shale volumes and high levels of stocks, the cartel looks out of puff.
