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This week we discuss the Government making money in July, the cost of Hurricane Harvey, the Euro, a surge for discount supermarkets and much more.
1. The Government’s July surplus
The Chancellor was able to deliver some good news last week, as in July the government recorded its first surplus for 15 years. According to the latest borrowing figures, the government brought in £0.2 billion more than it spent last month - an unexpected boost for Chancellor Philip Hammond. Government receipts were boosted by a strong labour market and the highest level of self-assessment income tax receipts. However, forecasts by the Office for Budget Responsibility (OBR) suggest Britain will borrow more this financial year than it did last year - a total of £58.3 billion. So far this financial year, total borrowing has reached £22.8 billion, compared to £20.9 billion at the same point last year.
The Chancellor has committed to eliminating the deficit by 2025, but these latest figures suggest he’s likely to miss this target. Since the last election, the government has become under increasing pressure to boost public spending. Public dissatisfaction with austerity, public sector pay and rising inflation is likely to lead the government into committing to more spending than previously planned.
Questions to ask yourself… Should the government commit to more public spending given the size of the deficit?
2. The cost of Hurricane Harvey
Many would have seen the devastating pictures of widespread flooding in Texas over the weekend, as Hurricane Harvey swept through the Gulf of Mexico. Parts of Harris County saw 30 inches of rainfall and it has displaced thousands of residents. Natural disasters have a significant impact on the local economy, but also national (and even global) economies. JP Morgan told its clients on Monday the cost associated with Hurricane Harvey could be $10-20 billion - the equivalent of almost one-quarter of the insurance industry’s earnings. As a result, US insurance firms performed poorly when markets opened on Monday morning. Shares in Travelers Companies closed down 2.56%, while Progressive dropped 2.25%. The oil industry was also adversely affected, due to refinery shutdowns in the Gulf of Mexico.
At $20 billion, it would be one of the most costly storms in recent American history and the biggest since Hurricane Katrina in 2005, which cost insurers $41 billion. However, the impact may not be as bad as it appears for the insurance firms, as JP Morgan also suggested 50% of the potential loss would be covered by reinsurance - insurance purchased by an insurance company.
Questions to ask yourself… How should the government and/or private companies support victims of the hurricane? Which other industries could be affected by flooding like this?
3. The strength of the Euro
The Euro has hit its strongest level against the pound in eight years, as new data forecasts economic prosperity within the Eurozone. Last week, the pound dropped to $1.08 and some experts claim it could go as low as $1.02 in the first quarter of next year. While there’s prosperity in the Eurozone, markets are worried about the lack of clarity over Brexit, which is causing the pound to slide further. Questions surrounding Theresa May’s leadership also appear to be impacting on the currency markets - many believe there will be a leadership challenge at the Conservatives’ annual conference in October, which is making investors nervous.
The Eurozone has been boosted by economic data last week showing activity picked up in August, with the manufacturing sector proving especially strong. Forecasts now expect this to continue throughout the second half of this year, which led to the Euro rising in value against most major currencies - it rose 0.4% on the dollar last week.
Questions to ask yourself… How much impact will Brexit have on the Eurozone? Why does a leadership challenge make investors nervous?
4. Companies to watch
In recent months, Uber has been embroiled in a string of scandals, but it didn’t stop them reporting a rise of bookings in the second quarter of this year. The car hailing service saw revenues from their bookings double from the same period last year, to $8.7 billion. The increase has been largely due to strong results in some of their developing markets, like Russia. Globally, this has helped reduce their losses by 14% on last year to $645 million. Earlier this year, #DeleteUber trended in the US, but these results clearly suggests customers haven’t turned away from the service.
In other Uber related news, the firm has chosen Dara Khosrowshahi to be its new CEO. The current Expedia boss will have a significant task changing the perceptions of the company, after being rocked by a number of scandals in recent months.
Discounter supermarket Lidl has overtaken Waitrose in market share to become the UK’s seventh biggest supermarket. The German company is the fastest growing grocers in the UK and recently reached a new market share high of 5.2%. Along with Aldi, discounter supermarkets now have a combined market share of over 12% and this is forecast to get bigger over the coming years. Their closest competitor Asda recently reported strong second quarter results, but this hasn’t prevented them losing market share (currently 15.3%) to their two newest rivals.
The so-called Big 4 supermarkets aren’t just under threat from the discounters. Amazon last week announced that when they finalised the takeover of Whole Foods, they will make adjustments to the supermarkets’ pricing model to make their prices more competitive.
French energy giant Total is set to acquire Maersk’s oil and gas business for £5.7 billion in an attempt to strengthen its activity in the North Sea. The deal will make Total the second biggest player in the North Sea region and shores up the balance sheet by investing in newer rather than mature fields. They will take ownership of Maersk Oil’s reserves of around 1 billion barrels of oil - many large oil firms are investing in replenishing reserves, suggesting a confidence that oil prices will rise in the near future. AP Moller Maersk’s shares surged 3.7% on the news, while Total saw their share value dip slightly.
Questions to ask yourself… How can Uber become profitable? What can Asda do to maintain their market share?
5. And finally… a market outlook
Is it the time to be worried about the markets? Ray Dalio, the owner of the world’s biggest hedge fund, thinks so and suggests the political instability in America will take its toll on the global economy. In an essay, the head of Bridgewater Associates, claims the US is the most socially and economically divided it has been since 1937. He suggests the current economic figures may look good, but they don’t tell the whole story. Read his post just here.