Walter Bagehot wrote that it was crucial to understand the difference between the “dignified parts” of the ‘English Constitution’ and the “efficient parts”. The Victorian author, who edited the Economist for 17 years, wrote that the dignified (or “theatrical”) parts included the monarch and the Lords, and “impress the many”; while the efficient parts, supremely the Cabinet, “govern the many”.
Last week, the prime minister was eager to demonstrate his efficiency in delivering Brexit – but couldn’t help adding his own dose of theatricality, too. Some MPs argued it was about time the government got on with Brexit – parliament has debated the referendum for three years, after all; other lawmakers saw the prorogation as undignified, arguing Johnson was trying to curtail parliament’s power over Brexit.
YouGov polling showed that 47% of UK citizens believe the prorogation was unacceptable against 27% who thought it was acceptable; perhaps unsurprisingly, the polling showed that your view of the prorogation tends to line up with your Brexit preferences. Another YouGov poll suggested that the prorogation move has not damaged Conservative election prospects – and perhaps especially if any short-term negative impact from a no-deal Brexit is yet to be felt.
“If there is a no-deal Brexit, it seems unlikely that the UK will be able to roll over all the current EU trade deals or quickly sign a new one with the US,” said Capital Economics. “The 13 continuity deals signed so far only account for about 8% of UK exports or less than half of the 40 or so free trade agreements the EU has with other countries and trading blocs.”
The reaction to Boris Johnson’s move was swift, and even threatens to achieve the unthinkable, a deal between opposition parties to block a no-deal Brexit. Others are seeking legal action to stop the prorogation, among them a former Conservative prime minister. In short, the big hitters are all choosing their weapons and a final battle appears imminent. Yet while Johnson’s announcement did knock down the value of sterling, the FTSE 100 was far from lively last week (and UK dividend yields are at their highest in a decade). Global investors, it seems, may be more focused elsewhere.
“This is a completely different political situation to anything I’ve experienced in my career, from the daily tweets of Trump to the daily machination of the UK’s exit from the EU,” said Chris Ralph, Chief Investment Officer at St. James’s Place. “It’s likely sterling will move quite a bit in the weeks ahead but there’s so much political uncertainty in the UK that many foreign investors see it as almost un-investable – and markets have been much more driven by US-China negotiations, events in the Middle East and even developments in Italy.”
Indeed, last week was a good one for US stocks, and the latest Deutsche Bank analysis of US Treasury data showed that foreign investors are piling into US stocks and bonds at their fastest pace in around a year. The S&P 500 certainly enjoyed a strong week, helped in great part by softening trade war rhetoric from both Donald Trump and a senior official in Beijing.
All the same, US GDP for the second quarter was revised down to 2.0% and, while date released last week showed consumer spending and corporate profits rising, economists’ projections showed growth slowing further in the current quarter. Business investment in the US has fallen for the first time since 2016. A Wall Street Journal poll found that economists’ 12-month US recession expectations are at their highest level since 2011. Absolute Strategy Research (ASR), an economics house, is among those predicting a contraction.
“We now believe that the US is likely to fall into recession next year,” said ASR. “A more aggressive policy response may arrive, but it will probably come too late – and we doubt the rest of the world will be able to shrug off a US recession.”
Markets now expect the Federal Reserve to take interest rates below 1% by 2021, but the Fed’s capacity to make significant interventions is limited by the fact that rates are already low. The US president has been vocal in calling on the Fed to do more – and to do it quickly; but he is perhaps especially perturbed by the strong dollar (even if plenty of analysis suggests his trade war has only boosted the greenback). Last Monday, the renminbi struck an 11-year low against the dollar. The US has been trying to shift some of its import reliance from China to Vietnam; that goal is only made more difficult by the weak renminbi and strong Vietnamese dong.
Elsewhere, Europe’s EURO STOXX 50 and Japan’s TOPIX both had positive weeks. The rises were largely hitching off the broader global trends, although unemployment in Japan struck a 27-year low and expectations of a less Eurosceptic Italian government aided Italian government bond prices. Indeed, Italy’s bond challenges now look like a walk in the park compared to those of Argentina, where the president last week announced his plan to extend the maturities on $101 billion of debt. But Standard & Poor’s had another word for it: “default”.
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