Hi everyone,

 

The markets appear to be looking for reasons to be positive of late. With China starting to reopen, and evidence that the supply chain is healing, it seems to be enough for investors to shrug off some of their concerns around inflation. Here in Canadian economic news, imports were up 1.9% and exports are up 0.6% in April. Although oil exports look to have moderated in April, both in terms of prices and volumes, we would expect the monthly trade surplus to remain around CAD2.5bn for a second month. Offsetting any easing back in oil revenues should be an uptick in auto exports. Although the trade surplus is likely to remain stable in the month, we expect an uptick in the surplus, back towards January highs as we move through the second quarter.

 

South of the border, the underlying trade balance was one of the pre-eminent U.S. data indicators (prior to falling out of favour). While CPI is clearly the key Fed policy determinant, we would argue that investors should not ignore the trade cycle. Over the last three months the trade deficit has averaged more than USD96bn, this comes as net trade proved a major drag on first quarter GDP. So a bit of good news in that arena, as the U.S. trade deficit fell 19.1% to $87.1 billion in April. While Fed policymakers may be currently in their quiet period ahead of next week’s rate decision, this does not stop market scrutiny of those in positions of power. In the wake of Yellen recently admitting that she was wrong on the path of inflation, a notable admission from a former Fed chair, we can expect plenty of partisan policy scrutiny. Expect particular questioning in relation to the perceived inflationary consequences of the American Rescue plan package. Critics would argue that the USD1.9trn package helped to amplify US inflationary pressures.

 

Across the pond, European markets are trading lower giving back half of yesterday’s gains with tech, retail and media names the weakest. Germany’s industrial orders fell more than expected in April for a third consecutive monthly decline, as weak demand and added uncertainty. Markets are pricing in a 50% chance of a 50 bp European Central Bank rate hike in July.

 

Meanwhile in the United Kingdom, the Prime Minister gained a pyrrhic victory (a victory or success that comes at the expense of great losses or costs). While such a scenario could become associated with Russian efforts in Ukraine, it clearly represents the outcome of the Conservative no-confidence vote in Prime Minister Boris Johnson. Although Johnson garnered the support of 211 of his MP’s, presumably including himself, some 148 or 41% of the Parliamentary party chose not to give him their backing or support. The outcome marks the worst performance in modern times by a sitting UK Conservative PM. Notably, this is worse than his predecessor Theresa May in December 2018 when there was a concerted campaign to oust her. For Johnson, a keen student of Churchill, the vote signifies the beginning of the end, not the ‘‘end of the beginning’’. With another Parliamentary inquiry still to come the authority of the PM is clearly damaged and as such the Parliamentary road map remains fraught with danger. The odds of the PM leading the party into the next election, still currently expected to be in May 2024, continue to dwindle on the back of the vote. Under current Conservative party rules, another no-confidence vote cannot be held for a year. However, internal party rules can easily be changed as necessary. As a consequence, the moment of maximum danger has yet to pass for the PM. Another inquiry, likely by-election losses on 23 June allied to the rising cost of living, risking a likely technical recession in quarter two and three, do not augur well for the PM. Moreover, the latter does not play positively for Sterling either, especially as the Bank of England faces increasingly uncomfortable choices. Beyond politics the macro backdrop continues to deteriorate. UK consumers retreated from spending in May according to the British Retail Consortium. Total sales were down 1.1% on an annual basis, this is the worst performance since January 2021, when the UK was in lockdown. The slide underlines that despite higher prices retailers are taking in smaller revenues. Sales of big-ticket items are under particular pressure. New car sales slumped for a fifth month in May, albeit supply issues are still having an effect here. That being said credit card data suggests that discretionary spending on factors such as eating out and streaming services are under pressure as consumers are forced to focus more on non-discretionary spending.

 

Swedish political drama persists ahead of an 11 September general election, the political fortunes of Social Democrat Prime Minister Magdelena Andersson remains highly uncertain. Andersson had threatened to dissolve the government, she currently presides over 100 seats in Parliament, 75 short of a majority, if her Justice Minister Morgan Johansson was removed in a no-confidence vote today. The far-right Sweden Democrats, who currently hold 61 seats, threatened to join with three other opposition parties in attempting to unseat the Minister of the Interior and Justice. Such a risk appears to have been averted by an abstention by independent member Amineh Kakabaveh, note her vote was key in the appointment of Andersson as PM in 2021. So despite a fragile governing coalition it looks as though the risks of Andersson being unseated ahead of September’s poll remain moderate. However, political squabbling ahead of the election remains an issue as the country embarks upon a move towards joining NATO. Currently Turkey continues to push back against Swedish NATO membership due to concerns for its support for Kurdish groups. Kakabaveh is an independent politician of Iranian Kurdish descent, underlining that if Andersson relies upon her support Turkish reticence towards Swedish membership of the defence alliance may persist.

 

Ukraine-Russia fighting continues in Severodonetsk, while Ukrainian President Zelenskiy appealed for more weapons to arrive sooner and EU's blaming of Russia for food crisis at UN overnight prompted walkout by Russia's ambassador.

 

Asian markets closed mixed with the tech sector while losses were capped by gains in the consumer sector in hopes of a demand recovery. The Reserve Bank of Australia lifted its cash rate by a larger-than-expected 50 bp to 0.85% in the biggest hike since February 2000. Japan's household spending fell faster than expected as the yen declined and surging commodity prices pushed up retail costs.

 

Oil prices were lower as the market juggled risk sentiment with supply concerns.

 

Finally, the 20 for 1 stock split of Amazon went through yesterday. So if you see a large drop in the value of Amazon, it’s because you have 20 times more shares. As previously noted, stock splits are generally viewed as a positive for future gains as most companies will only do a split to bring down the share prices to what investors perceive as more attractive levels.

 

As always, give us a call if you have questions or if you’d like to get together for a review.