27 August 2019
Continued tension in Europe
In 1878, Russian author Leo Tolstoy published Anna Karenina, which opened with the line: “Happy families are all alike; every unhappy family is unhappy in its own way.” This line could all too easily be applied to the European family just now, which is dysfunctional to say the least.
Things failed to improve last week, with Europe’s attention preoccupied by events in Rome. Italy’s Prime Minister Giuseppe Conte resigned his position, and blamed the current deadlock on the far-right Northern League, Matteo Salvini. Whether a fresh coalition can be created quickly enough remains to be seen – if it cannot, then Italy faces an election, potentially in the middle of sensitive budget negotiations between Brussels and Rome.
Ken Hsia of Investec, Manager of the St. James’s Place Continental European fund, and Co-manager of the Greater European fund, commented:
“We don’t see the latest Italian political news as particularly significant, given the country’s rapid rotation of Prime Ministers in recent years, typically every one to two years – indeed, the spread between Italian and German sovereign yields suggests Italian country risk is broadly stable. Despite weakening data globally, we find attractive bottom-up investments in Europe, in sectors such as healthcare, technology and online gaming.”
Relations between the UK and the EU were still frosty last week. Boris Johnson wrote to Donald Tusk, asking for the Irish backstop to be removed from the Withdrawal Agreement. Tusk duly refused. Johnson visited the French and German leaders last week – the former said the backstop was a non-negotiable; the latter said it was up to the UK PM to find an alternative. All the same, the suggestion that the Withdrawal Agreement could yet be amended in time for 31st October delivered a small boost to sterling late in the week.
European economies rally despite sag in growth
Last week’s troubles arrived amid signs of wilting European growth, not least in Germany. Last week, eurozone inflation for July came in at its lowest level in two years: just 1%. Berlin did at least suggest that it might be willing to countenance a rise in German debt levels in a bid to stave off recession – the share prices of European banks rallied in response.
On the contrary, in the UK, the latest data showed retail sales 0.5% higher in the three months to July, which may be enough to keep the economy out of recession for the moment. Business investment is down, but has hardly dried up – last week, Hong Kong businessman Victor Li (son of Hong Kong’s richest man, Li Ka-Shing) paid £4.6 billion to purchase Greene King, the UK’s largest pubs and breweries group. Shares in the company soared 50% as a result.
Hong Kong’s unrest could spark a global recession
Li senior has suffered paper losses of $3 billion this year due to unrest in his home city. Hong Kong’s economy is plummeting on falling business investment and consumption rates; new business from mainland China is falling especially fast, according to Bloomberg. Last week, a leading authority on the global financial crisis, Carmen Reinhardt, told media that, given Hong Kong’s significance to East Asia’s economies, the current problems could ultimately lead to a global recession.
US-China trade war escalates
The trade war continues to make its presence felt on markets. On Friday, China announced $75 billion of tariffs on US imports. After a fairly stable week up to that point, the news sent markets tumbling. The US duly responded, saying it would begin the process of raising tariffs on $250 billion of Chinese imports from 25% to 30% from 1st October. Yet amid the escalating tension, President Trump claimed on Monday that the two countries would resume trade talks “very shortly”. Despite the more conciliatory comments, markets started the week in mixed moods. Investors remain nervous, and unconvinced.