WeeklyWatch – Politics strike sterling, the renminbi and global stock markets

Monday 5th August 2019

Stock Take

Sterling hits 30-month low

What does the new Prime Minister think of the state of sterling, which last week declined to a 30-month low against the dollar? Luckily, in Trump-Twitter-style, Johnson made clear his thoughts on the same scenario in a newspaper column in 2008, writing that the drop in sterling during the holiday season was no less than ‘the definition of a national humiliation’, placing the blame squarely on the government of the time…

Brexit rests on Irish backstop

July was a tough month for sterling, but there was a marked drop since Johnson took up his post, with investors not taking kindly to the increased possibility of a no-deal Brexit. Last week, Johnson made it clear that he would not countenance the Irish backstop (the main sticking point in Brexit negotiations), and would only negotiate with the EU as and when it showed willingness to scrap it, saying that the situation was “very much up to our friends and partners across the Channel”. He also rejected invitations for meetings with both the French President and German Chancellor.

Relations between Downing Street and other UK leaders were also frosty, despite Johnson’s official visits – Belfast was the one exception (on the DUP side). More and more leaders spoke out about the possibility of departure from the UK, perhaps encouraged by recent polling. Meanwhile, Downing Street acknowledged that direct rule of Northern Ireland is now a possibility.

While the PM continued to speak optimistically about making for a deal prior to exiting the EU, Michael Gove said a no-deal outcome was now the working assumption and Sajid Javid ordered HMRC to make no-deal preparation its “absolute top priority”.

This may well be an elaborate bluff; however, someone should let investors in on the secret – not only was the pound down last week but the yield on the UK government 10-year debt dipped to an almost three-year low – another indicator that investors are running for safety. Banks and hedge funds, moreover, have started increasing their bets against the pound.

A ‘one in three chance of recession’

Nick Andrews of Gavekal Economics commented: “The pound’s fall is all down to the new British government and [Boris Johnson’s] “do or die” Brexit campaign. Currency markets are spooked but it is most likely just a negotiating tactic. When a deal is finally struck, Britain’s strong economic fundamentals mean it is well placed for a boost in growth, along with the pound.”

But since this is not the mainstream view on markets, many expected the Bank of England to raise interest rates last week. Instead, the Monetary Policy Committee declined to run to the rescue, instead leaving rates unchanged and warning that the UK had a one in three chance of recession at the start of 2020.

Worries over global growth, trade and earnings weighed on global indices

The FTSE 100 dropped for the week, although this had little to do with politics – after all, a fall for sterling tends to be good news for the index. Instead, worries over global growth, trade and earnings weighed on sentiment across global indices. Companies continued to report a range of results: Alphabet overtook Apple as the company with the largest cash reserves worldwide, Apple itself reported better-than-expected results, Aston Martin reported losses for the first half of the year, Shell saw its profits dip a quarter on price declines for liquefied natural gas, BAT had a strong three months, and Toyota cut its profit forecast, citing the strength of the yen.

Federal Reserve cuts interest rates

But the biggest news for markets last week came in the form of the Federal Reserve cutting interest rates for the first time since the global financial crisis, and Donald Trump announcing the imposition of a 10% tariff on $300 billion of Chinese imports. The Fed cut came in at 0.25%, as expected – a smaller cut than the President had hoped for – one bank said this was due to trade tensions and “uncertainties” in the global economy. The Fed hinted at further easing to come and Bloomberg data shows that markets are now convinced a second cut is coming next month. The US jobs report showed a slowing rate of growth, but hardly a disastrous one. Moreover, data from Europe last week added to the impression that the US economy is performing much more strongly than those of the UK and eurozone.

Politics also affect the renminbi

While the S&P 500 held through most of the week, Trump’s tariffs announcement on Friday saw it slide. China’s Shanghai Composite index fell in response, as did emerging markets more broadly, although the latter’s slide should be viewed in the context of a strong year for emerging market equities.

China was not alone in Asia in feeling the heat of trade hostility, but its own response came in the form of allowing the renminbi to weaken – the currency this morning struck an 11-year low against the dollar. Elsewhere, South Korea found itself removed from Japan’s ‘white list’ of export-approved countries over a dispute about wartime labour. South Korea’s KOSPI and Japan’s TOPIX indices both ended the week down.

Wealth Check

Holidaymakers may already be feeling the pinch as no-deal Brexit fears hit the pound. But what else could a Boris Johnson government mean for your money?

Lauren Smith, Investment Communications Executive at St. James’s Place, commented on the pound’s decline: “Events like this highlight the value of maintaining a balanced and globally diverse portfolio that can help absorb the impact of unpredictable currency movements. It’s important to resist the temptation to change your portfolio strategy based on the latest headlines.”

Commenting on Boris’ pledges, such as his vow to raise the higher rate income tax threshold to £80,000 (tempered by a rise in NI insurance contributions for higher earners), his pledge to scrap stamp duty on property purchased for less than £500,000, and the fact there’s unfinished business when it comes to pensions and Inheritance Tax, Smith said: “It’s key to remember that with Brexit and the possibility of a general election looming, these pledges are far from concrete – you should always plan your finances based on what you know.”

In The Picture

The strong performance of equity and, in some cases, property markets has been a boost for HMRC as well as investors. Figures released last week for the 2017/18 tax year showed that the amount of chargeable gains, the amount of Capital Gains Tax paid and the number of CGT payers were each the highest in the history of the tax.

The revenue hit itself a new high of £8.8bn, as 281,000 taxpayers paid a bill for selling valuables. In April 2019, the Capital Gains Tax annual exempt amount for individuals increased from £11,700 to £12,000.

It’s a reminder of the importance of using tax-saving tools. Effective and repeated use of your CGT exemption is a great way to transfer assets into ISAs or pensions to provide a shelter from any future liability.

Capital Gains Tax statistics

The Last Word

“Just because you do not take an interest in politics does not mean politics will not take an interest in you.”

Pericles, champion of Athenian democracy in 5th Century BC. His bust now resides in 10 Downing Street.

The information contained is correct as at the date of the article.

The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place or Wellesley Wealth Advisory.

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