23 December 2019
Following in Trump’s footsteps
He might be able to quote Roman poets, but last week Boris Johnson seemed more interested in terms coined during the Trumpian era. The PM told his new Cabinet that they should see themselves as a “people’s government” and, as such, banned them from attending the glitzy World Economic Forum in Davos, in a bid to appeal to the Tory’s new working-class voters.
And, keeping his electoral word, in the Queen’s Speech Johnson stressed his commitment to prioritising a quick Brexit over a close continuing relationship with the EU. On Friday, he duly passed his Withdrawal Bill comfortably through parliament, just days after his election victory. In true Trumpian fashion, the Prime Minister, having blocked the pre-election publication of a report on Russian meddling in UK politics, sought to pile pressure on the media and judiciary. The BBC’s licence fee and the power to appoint judges will both be subject to government reviews.
On the whole, Johnson has had a positive first few months on markets (again, reminiscent of Trump’s experience). Although his resolve to not delay the transition period (and, in doing so, risk a no-deal Brexit), delivered sterling’s biggest single-day loss since November 2018, the currency remains comfortably up since Johnson came to power. Not only that – economic data last week came in positive for jobs, which reached their highest level since 1974, even as weekly real earnings remained below their pre-crisis peak.
A Christmas lift for stocks and shares
The FTSE 100 enjoyed a strong five days, and looks set to clock an exceptionally strong year. Indeed, stocks around the world have continued to enjoy their bull run this year, from the US (see ‘In The Picture’) to emerging markets: the S&P 500 in the US, CSI 300 in China and EURO STOXX 50 in Europe all rose last week, and are likewise set to end the decade on good form.
This reflects, in part, the continued growth in the global economy. China’s industrial data and retail sales picked up, and US Purchasing Managers’ Indices pointed to rising confidence, while sentiment remains strong after the progress made in US-China talks the previous week. In short, an imminent global recession is not widely anticipated, although there are weak spots, among them growth in Europe.
David Riley of BlueBay said:
“It may be some time until we witness another year in which gains are as impressive, given that we appear to have reached the limits of monetary easing in many jurisdictions and equity valuations are becoming stretched on the S&P. In many respects, 2019 has been a year in which macro fears have gradually melted away.”
The relatively buoyant market mood could yet mean more deals in the UK market, with Labour’s nationalisation plans now well and truly off the festive menu. One touted beneficiary is Deutsche Bahn (DB), owner of Arriva, a UK transport company. Arriva, which has its headquarters in Sunderland, might have been taken into public ownership under Labour plans. DB now plans to list Arriva on markets in 2020.
Oil and interest rates
Oil was another key feature of the week. The sector has been stable through the second half of the year, despite the largest supply outage in the industry’s history. Global oil traders continue to use Brent crude as one of their two leading price guides: last week it closed at $65 a barrel. The Brent oilfield in the North Sea, after which the benchmark is named, is no longer economically viable. Shell is currently decommissioning its four platforms at the site (the related tax breaks mean it has disclosed it paid no tax on £731 million of profits last year). Bad publicity it may be, but the FTSE 100’s largest listing has barely fallen this year.
Central banks offer another reason why many investors continue to feel optimistic about the outlook for 2020. Sweden’s Rijkbank, the world’s oldest central bank, finally ended five years of negative rates last week, but the Bank of England left rates on hold in anticipation of a post-election growth boost. It expects growth in the fourth quarter to rise “only marginally”, but still anticipates improved growth in 2020. Further afield, investors are banking on the ECB and Fed continuing to be cautious of rapid tightening.
Any rapid tightening would be a concern for emerging markets. Last week, the World Bank warned of a “towering” pile of emerging market (EM) debt, adding up to $55 trillion – the fastest such increase in modern history. That puts debt at 170% of EM GDP, while in China it is 255%. Unsurprisingly, China accounts for the lion’s share of the broader EM figure. So long as growth remains robust, this is thought to be manageable – unless rates track upwards at any speed.