Good morning! The deluge of results has slowed down to a trickle.
Wrapping up the report there at 12pm. Have a great weekend.
Macro - bund yields
One of the most interesting macro stories this week was the explosion in German bund yields. The bund is their equivalent to the 10-year UK gilt.
This 1-month chart illustrates it nicely:
Chart courtesy of tradingeconomics.com
Wednesday has been described as the worst day for German bonds since around the time of the country's reunification in 1990.
It might not surprise you to learn that President Trump is at the heart of the story: he has repeatedly argued that other NATO members do not spend enough on their own defence. Last month, he told European leaders in a speech that "stark strategic realities prevent the United States of America from being primarily focused on the security of Europe.”
European leaders have responded. Following an election, Germany's latest crop of newly-elected politicians have indicated that they will ease their long-standing budgetary restrictions. Defence spending over 1% of GDP will be exempt from existing borrowing rules, and they also plan to set up a €500 billion infrastructure fund - a figure that's higher than their entire annual budget.
The result has been stronger European equity markets - especially in defence and construction - and higher yields.
The UK's 10-year gilt yield has also moved higher this week. Here's the 1-month chart:
Chart courtesy of tradingeconomics.com
What we saw on Wednesday was a conventional "risk-on" move, with money flowing out of bonds and into equities.
However, these higher government bond yields are also a force for the equity markets to reckon with. If we can now earn 4.6% risk-free from the UK, or in euros 2.9% from the financially very strong German government, our expectations from corporate credit and in turn from equity markets have to be very significantly higher than this.
With attractive real returns available from vastly safer alternatives, perhaps we have to accept that it's logical for micro-caps of questionable quality to trade at the cheap earnings multiples we are currently witnessing?
Companies Reporting
| Name (Mkt Cap) | RNS | Summary | Our view (Author) |
|---|---|---|---|
Alliance Witan (LON:ALW) (£4.9bn) | Final Results | Return +13.3% trailed benchmark (+19.6%). Average discount narrowed to 4.7%. | |
Just (LON:JUST)… |
