21 October 2019
Latest Brexit deal stumbles
The constitutional arrangement of the British Isles has never felt more relevant, with the status of Northern Island once again playing a key role in sinking a Prime Minister’s plans. Over the weekend, DUP MPs were among those who voted in favour of the Letwin Amendment, which had the effect of postponing the vote on Boris Johnson’s new Brexit deal.
The DUP took exception to Johnson’s deal, arguing that it contradicted his November 2018 comments that any regulatory or customs distinction between Britain and Northern Ireland would “be damaging the fabric of the union”, and his promise that “no British Conservative government could or should sign up to any such an arrangement”.
Trading this morning (Monday 21st October) saw the pound drop against the dollar as hopes of a swift deal fell, which in turn pushed the FTSE 100 up. Both movements were relatively subdued, however, suggesting investors are not making any rash assumptions. This is a wise course, given that parliament may yet approve the deal this week.
At the time of writing, Brexit was set to impact markets once again as Speaker of the House of Commons, John Bercow, was due to announce whether he would allow a further vote on the government’s new Brexit deal.
US-China tensions look set to calm
Much as Brexit continues to make itself seen on markets, the US-China trade war still dominates the picture. Last week, the two superpowers announced “phase one” of a new trade deal, whereby China will buy more US soybeans to the value of around an extra $40-50 billion – soybeans are the principal US export to China. The deal came at good timing for sentiment, and the S&P 500 finished the week higher.
David Riley, Chief Investment Strategist at BlueBay, which co-manages the Strategic Income fund, commented:
“We’ve had a skinny deal. I wonder why we’ve gone down this route if it boils down to China buying more soybeans. But even that temporary deal will relieve some of the uncertainty we’ve had and be positive for trade and manufacturing.”
Trump tax cuts boost fades away
The US-China news helped to cushion the impact of less happy data. A report published last week by Alpine Macro showed that US fiscal policy is no longer stimulative, meaning the Trump tax cuts boost has now petered out.
Furthermore, CEO sentiment in the US is on a marked decline and last week the Fed, in its Beige Book report, downgraded the US growth outlook. It has also begun buying up short-term government debt at a rate of $60 billion a month (technically not quantitative easing because it’s short-term debt, but investors are unlikely to complain).
“The yield curve is saying there is a one in three chance of the US going into recession in the next 12 months – and US recession means global recession. We are already in an industrial recession, not least in Germany and Korea. But the overall global economy is being held up by solid consumption and services, and consumer confidence has stayed high, even in Germany.”
Meanwhile, official Chinese growth came in at just 6%, making any turnaround in US-China trade negotiations all the more positive for markets, although negotiators have just four weeks to find an agreed text.
Brian Horrigan, Chief Economist at Loomis Sayles, commented:
“US-China negotiations have collapsed before, and it could happen again. Having said that, I am encouraged by the progress we’ve seen so far. I think the odds favour the successful conclusion of a small deal. If Trump and Xi sign in November, scheduled tariffs would likely be suspended, which would reduce uncertainty and boost economic optimism. I view a deal as positive for the US and global economy and financial markets.”
A positive week elsewhere
Continental European and domestic UK stocks enjoyed a buoyant week on markets. In part, this reflected US-China momentum, but it also came on the heels of the UK and EU agreeing the new Brexit deal. News of that particular breakthrough sent sterling on a flyer, which in turn boosted the FTSE 250, and sent the FTSE 100 the opposite way (reflecting its high weighting of non-sterling earnings). The EURO STOXX 50 also ended the week up.
However, it wasn’t all good news in Europe. Domestic demand continued to drag in Germany, France and Spain, while Italy’s exports are struggling. The EU, the world’s second-largest importer of goods, is importing less than it was. In the UK, retail sales remain robust, but 56,000 jobs were shed in the three months to August and the IMF said the current government would not now succeed in balancing the budget until 2025.