30 September 2019
The Eurozone isn’t out of the woods just yet
Last week, we not only saw a bitter and emotional debate between MPs as the Brexit saga reached new heights, but we also saw 11 judges of the Supreme Court, the UK’s highest judicial body, unanimously rule Boris Johnson’s prorogation of parliament unlawful.
During the drama that we see in UK politics, an unlikely star emerged in the form of a spider brooch worn by Lady Hale, President of the Supreme Court. This item caught the eye of many people looking for answers to the Brexit conundrum. Was this possibly a suggestion that the Prime Minister is trapped in a web of his own creation?
In response to these events, we saw the sterling drop down for the week by Friday lunchtime.
David Riley of BlueBay Asset Management said: “The decision raised the political temperature to boiling point but did not meaningfully alter the chances associated with various paths for Brexit. The aftermath, however, has revealed the depth of the Brexit fault line in British politics – and that does not bode well for sterling assets over the longer term.”
It’s no surprise that, as the Brexit path is still unclear, that there’s an obvious impact being felt on business – a study from the Federation for Small Businesses showed that just one in five companies is ready for the UK’s exit in just over a month. In addition to this, we saw Thomas Cook go into administration and subsequently collapse, Jaguar Land Rover announce the temporary closure of production plants, and Sainsbury’s confirm the closure of 100 stores and 70 Argos branches.
The fall in the pound came as a result of the Bank of England forecasting future interest rate cuts that would help to mitigate the economic impact of Brexit uncertainty if a no-deal is avoided. This isn’t just the case in the UK, major central banks worldwide have turned dovish as of late. Despite this, divisions over easing at the European Central Bank were laid bare when the group’s most senior German official resigned in opposition to the bank’s planned bond purchases.
Although we have seen these levels of uncertainty, data released on Thursday has show that in the eurozone, business lending has increased 4.3% since August last year, while consumer confidence in both Germany and the UK was marginally better that first expected. For France, however, they pledged $10 billion of tax cuts in its 2020 budget, and the automotive industry also shows further signs of decline. It can be said that the eurozone remains in the woods, especially if we consider Trump’s threat to impose $8 billion of tariffs on the EU after a row with Airbus.
It’s not all plain sailing in America
Last week also saw the US President get caught in a web of his own last Tuesday, as the Democrats opened an impeachment inquiry following revelations that Trump had pressured the Ukrainian Prime Minister to investigate a rival US presidential candidate. This led the S&P 500 to fall more than it has in a month – it continued to fluctuate throughout the week, and then slipped on Thursday night as investors mulled over the impeachment’s potential impact on the economic outlook and 2020 election.
When news of the inquiry spread, we saw it cast a long shadow over the global markets, which had started the week positively as a result of the US and Japan being close to reaching a trade deal, but this had all reversed by the time the markets closed on Thursday.
This wasn’t the only thing that dropped – we also saw consumer confidence fall during September amid trade fears. While the country’s trade in goods deficit rose $400 million over the course of the month, economists raised concerns about the decline in IPOs, which has seen a drop of 25% in the last year alone, therefore reflecting worries over the trade war and a possible economic slowdown.
Although the concern on the impact of tariffs runs deep, Nike were an exception to the rule as they published their quarterly results, which were better than expected, and shares also hit an all-time high as a result. They also attributed the 7% rise in sales to one country: China.
An Asian update
Just like the UK, Asian markets had a bumpy week – stocks across China showed signs of strain as the Hong Kong index hit a three-year low and China’s CSI 300 dropped before recovering slightly on Friday. Thursday saw the US levy further tariffs against the country for its alleged shipping of Iranian oil, while production in Saudi Arabia has recovered to more than eight million barrels a day, helping to push the prices back down to $62 a barrel. During this time, their vulnerability was also highlighted as the US deployed 200 troops and an air missile system to the region.
As China continues to steady the impact of the ongoing trade way on its economy, Asia’s emerging economies are profiting. From date released last week, we can see that exports from developing countries – especially Vietnam and Bangladesh – to the US have risen 10% compared to this time last year. As the US-China negotiations are changing weekly, these emerging economises are wasting no time in seizing a market share and reshaping global supply chains.