31 May 2018

The Fly in the Ointment

Beware of the unexpected.

While there is little of note on either the corporate or the economic front taking place in the near future (though the start of June will see the first of a raft of Purchasing Managers Indices which will give a clue as to how confident business is feeling as we head into summer) politics has reared its ugly head to unsettle investors. We did see our own FTSE 100 Share Index reach new high territory in recent weeks, but shares have reacted in a nervous fashion, as investors express their concerns over political uncertainties in Italy and Spain.

True, there has been a sense of relief that we survived May, often a difficult month, relatively intact and the profit taking that took place was at least from a high level. But an upcoming vote of confidence in the Spanish parliament and, more important, the spat that has developed between the populist parties and the President in Italy have served to raise again the spectre of unrest in the European Union. The Italian electorate are demanding change, but the President seems set on preserving the status quo.

The uneasy situation that has developed in Italy has taken some of the pressure off the pound, which had suffered recently. The Brexit talks have been rumbling on with little consensus being achieved and sufficient unanswered questions to give negotiators on both sides a headache. Fears of Britain leaving without a deal have been sufficient to ensure sterling has remained relatively friendless – until the prospect of Italy leaving the single currency zone arose, that is.

Oil, which has been steadily rising in price over recent months, also suffered a setback as belief grew that the OPEC nations and Russia would remove supply caps at a meeting due to be held in late June. The appreciation in the oil price to around $80 a barrel has gone largely unremarked, perhaps an indication that this most crucial of commodities enjoys less influence than in the past. With non OPEC production in decline, an increase in supply could limit the scope for further price appreciation.

With little likely to emerge in the way of company results until the days start to shorten and the summer holidays not that far distant, perhaps markets can settle down to a period of quiet optimism. But Italy, where a second general election remains a strong possibility, has emerged as a wild card and could deter investors until some sort of resolution is achieved – which could take some time. Trust politics to muddy the waters.

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