The UK economy stutters over Brexit uncertainty, a “nervous” stock market in the US
Last Thursday the Bank of England (BoE) increased interest rates for the first time in 10 years. The pound reacted by slipping 2%, its biggest drop since the week after the June 2016 Brexit vote. The BoE revealed that it expects two more hikes in the next three years, but it largely depends on the deal Britain negotiates with the EU.
Therefore it is not surprising that investors are cautious, and they will be monitoring closely what happens on Thursday’s meeting, when the next round of negotiations over the separation will take place.
The main concerns are whether Prime Minister Theresa May can ensure the two-year transition deal she wants, thus providing a smoother exit from the bloc.
The uncertainty over Brexit is already taking its toll on the UK economy.
Auto sales are down 12.2% in October and retail spending has slumped at its fastest pace since 2008, according to the British Retail Consortium’s survey.
Meanwhile in the US, The Dow Jones Industrial Average is flying high, achieving a fourth consecutive record-high close on Tuesday. The S&P 500 was on the other end of the spectrum with a 1.33% dip.
Jake Dollarhide, CEO of Longbow Asset Management, pointed out “nervousness in the market” as the reason why “Companies that miss expectations are being punished severely”.
There is also tension in some investors about the potential outcome of a Republican plan to cut corporate taxes. The proposal is for a corporate rate reduction to 20% from the current 35%, but it would also eliminate many tax breaks. The bill is expected to face opposition from the groups it would affect, mainly smaller companies.
Other investors are already on the move. Instead of waiting to see how the tax legislation will develop, they bet on the companies that are expected to benefit most from the changes.
The House Republican plan would allow businesses to bring back foreign profits at a tempting 12% tax rate, a process known as repatriation. The untaxed cash that US companies hold in offshore funds is in the likes of $2.6 trillion.