Monday 15th July 2019
The ‘special relationship’ in turmoil
It’s been over 70 years since Churchill made popular the term ‘special relationship’, with many powers-at-be using it to describe the close Anglo-American relations throughout the decades. However, the relationship appeared shaky (to say the least) last week, with UK ambassador Kim Darroch resigning following leaks of confidential communications in which he described the Trump administration as “inept” and “uniquely dysfunctional”. President Trump retorted, publicly denouncing Darroch as “wacky”, “pompous” and “very stupid”.
Interest rate fears in the UK
Aside from Darroch’s downfall, interest rates were high on the agenda in the UK last week, as a member of the Bank of England’s Monetary Policy Committee (MPC) suggested that rates could be cut to below 0.25% in the event of a no-deal Brexit. That said, the MPC also suggested that, if a Brexit deal was struck, it could lead to rates rising to 1% within the next 12 months, potentially offering a boost to investors.
The Bank of England also detailed improved contingencies in place within the banking sector in the event of a no-deal Brexit. The Financial Policy Committee reported: “Even if a protectionist-driven global slowdown were to spill over to the UK at the same time as a worst-case disorderly Brexit, the core UK banking system would be strong enough to absorb, rather than amplify, the resulting economic shocks.” Confidence, indeed.
Sterling continues to weaken
An ongoing thorn in the UK’s side is the pound, which hit a two-year low against the dollar and a six-month low against the euro last week. Wimbledon men’s singles champion Novak Djokovic in particular may feel it in his pocket – if he converts his £2.35 million winnings to his native Serbian dinar, he will take home around £150,000 less than he would have done had the tournament been held in March. Ongoing Brexit concerns have been blamed for the weakness of sterling in recent months, although the FTSE 100, which is very much a global index, was slightly down for the week.
The fall in sterling has also hit holidaymakers, as schools begin to finish for the summer. Many keen sunseekers will also be anxiously checking for updates on Thomas Cook – the travel company insists that customers’ holidays are secure, despite it seeking a £750 million rescue package from its largest shareholder. The retail sector has also suffered: the British Retail Consortium showed average sales growth slowed to 0.6% in the 12 months to June, the weakest reading since its records began in 1995.
On a more positive note (quite literally) for sterling, today it has been announced that visionary code-breaker and mathematician Alan Turing will be the face of Britain’s new £50 note. The note’s design features a ticker tape of binary code that spells out his birthday (23rd June 1912), and depicts the ‘British Bombe’ machine that helped break the Enigma code. It also includes a quote from Turing: “This is only a foretaste of what is to come, and only the shadow of what is going to be”.
A UK economy contraction on the cards?
This onslaught of negative data has led economists to allegedly forecast a contraction in the UK economy during the second quarter; it would be the first quarterly contraction since 2012. However, month-on-month GDP results up to the end of May indicated a better-than-expected jump of 0.3% for the UK.
It was a similar story in Continental Europe, where hopes of staving off a recession were boosted by news that industrial production in the eurozone was up 0.9% from last month. Despite this figure being 0.5% lower than a year earlier, Capital Economics believes that it should “allay concerns about the wider economy falling into recession”.
US markets continue to break records
Across the pond, it was a slow start to the week, as better-than-expected job results prompted fears that the Chair of the Federal Reserve, Jerome Powell, may delay a rate cut beyond July, and yet US markets continued to flourish. The CME FedWatch Tool showed that traders have priced in a 100% probability of a US rate cut this month, supporting the market’s continued confidence.
The bull run is already the longest ever recorded and the S&P 500 and Dow Jones both hit new peaks last week. Technology stocks drove the S&P higher and have continually proven to be a bulwark this year for Wall Street. The sector is up around 28% in 2019 and is outperforming the S&P 500 by around 10%. Although calls for the anticipated cut will continue to grow, the US Consumer Price Index – a widely followed measure of inflation – posted its biggest gain in 18 months on Wednesday and gave the Fed food for thought as to the scale and timing of the rate move.
China growth slows
Reports from a survey by the Association for Financial Professionals suggest that China grew at its slowest rate in nearly three decades in the second quarter. The poll indicated that world’s second-largest economy expanded by 6.2%. Yet the consequences of the trade war may be exaggerated, as Chinese exports fell less in June than anticipated, while retail sales and industrial production both outperformed forecasts. The main Asian markets closed the week slightly higher.