WeeklyWatch – Brexit progress comes to temporary halt

21 October 2019

Stock Take

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).

Riley said:

“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.

Wealth Check

Retirement is lasting five years longer than expected for most people, leaving many facing a serious income shortfall.

According to research by Scottish Widows from earlier this autumn, one in five people are basing their own life expectancy on that of their grandparents, despite lifespans increasing across the three generations.

The average UK adult expects to retire at 65 and live until they are 82. However, average life expectancy is 87 years, meaning those five additional years will require an extra £80,000 in pension savings. If the research is correct, the result is that people will have to put aside £340,000 during their working life.

Experts suggest that people working today need to plan for at least 30 years in retirement, and they need to save and invest differently from current retirees – many of whom are in receipt of guaranteed final salary pensions.

Tony Clark, Head of Retirement Marketing at St. James’s Place, says:

“Nobody knows how long they will live, but what we do know is that people are living longer and staying healthier – and, thanks to medical advances, extending their quality of life. This highlights the importance of making the right investment decisions for your retirement. We can all suffer from behavioural biases when it comes to investing, but quality advice can keep your retirement plans on track.”

In the Picture

St. James’s Place has launched a new financial education platform aimed at under 30s, with the goal of removing confusion around the big decisions that impact your money. Click the image below to see Rob Gardner, St. James’s Place Investment Director, discuss the importance of financial education for young children.

The Last Word

The door of China’s opening up will only open wider and wider, the business environment will only get better and better, and the opportunities for global multinational companies will only be more and more.

– Han Zheng, Vice Premier, reading last week from a letter written by China’s President.

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

BlueBay and Loomis Sayles are fund managers for St. James’s Place.

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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