Beaufort Analysis 258 – UK banks cross the line
In the UK, all seven banks passed the annual stress test with no further instruction from the Bank of England (BoE) for additional provision or change to strategy. Stress test scenarios are reviewed each year but the scenario for 2017 was based on an event worse than the Great Financial Crisis (GFC) and factored in some of the following assumptions; a significant fall in Sterling against the US Dollar, a decline in house prices and broad global economic decline. Governor of the BoE, Mark Carney, gave a press conference later that day, warning that conditions could be more severe than those stress tested, should we face a disorderly Brexit. On the subject of Brexit, it appears that the UK government are very close to finalising the divorce bill with the EU, with further clarity expected in the next few days.
European markets continue to move higher on the back of continued positive economic data. The Purchasing Managers Index (PMI) broke through the 60-mark in November, the second highest in the survey’s 20-year history. Eurozone factories were the main driver, despite increasing prices at the fastest rate in more than five years; this expansion is likely to extend into December as new orders soar and headcount increases at the fastest rate on record. Equity markets aside, Germany appears to be making headway on the current political gridlock with hopes of a renewed coalition between Chancellor Merkel’s, CPD (Christian democrats) and Head of SPD (socialists), Schulz. There are currently three options available to Germany’s political leaders; a coalition, a Merkel-led minority government or new elections. Whilst a coalition is the favoured option, much compromise would be required from both parties and as discussions progress, we expect more detail to be made available in the coming weeks.
Finally, in the US, the Senate passed ‘a version’ of tax cuts in a closely run vote of 51:49; although there are differences between the Senate bill and that proposed by the House, a conference committee will now be formed to reach consensus between the two. Trump’s flagship reform is likely to provide a further fillip to US equity markets which will, in turn, enable the Federal Reserve to revisit forecasts and sets the scene for further rate hikes in 2018.