Will auld acquaintance be forgot?
Last week, the Withdrawal Agreement was voted into law in the European Parliament, followed by hugs and promises of return from some UK MEPs, and flag-waving and whoops of jubilation from others. The session closed with a rendition of ‘Auld Lang Syne’. What had begun under Ted Heath in January 1973 finally ended at 11pm (or midnight, Brussels time) on Friday, 47 years later.
In the interim the UK has been Janus-faced, encapsulated in the premiership of Margaret Thatcher: probably more responsible than any other European leader for completing the Single Market, she opposed the political and federal union implied by the Maastricht Treaty. Like Churchill, she favoured a kind of semi-detached status that enabled the UK to act as bridge between the US and Europe, in a world order held together by US leadership.
That world looks different today, with the US in retreat from the rules-based international order it has traditionally upheld and dominated, and China looking to create a more bipolar world. But the old conundrum expressed in 1962 by Dean Acheson, former Secretary of State to Harry Truman, remains as contentious and pertinent today as ever it did. “Great Britain,” said Acheson, “has lost an empire and has not yet found a role. The attempt to play a separate power role — that is, a role apart from Europe, a role based on a ‘special relationship’ with the United States, a role based on being head of a ‘commonwealth’ which has no political structure, or unity, or strength — this role is about played out. Great Britain, attempting to be a broker between the United States and Russia, has seemed to conduct policy as weak as its military power.”
We shall see. Dominic Cummings, campaigner extraordinaire and now right-hand man to the prime minister, is certainly not short of the ideas (or chutzpah) to push for some bold policy steps. In any event, trying to find meaningful short-term market responses to the end of 47 years of EU membership is a fool’s errand. When it comes to the impact of Brexit, investors, like everyone else, will just have to wait and see. As the video explains, significant new trade deals generally take years to iron out; Friday’s exit was, in reality, only the end of the beginning. All the same, the prime minister did offer some initial clarity over the direction of travel this weekend, emphasising that his government would not be seeking regulatory alignment with the EU.
But investors both in the UK and around the world were more focused last week on the spread of the coronavirus from Wuhan to other parts of China and much further afield. At time of writing, the had claimed some 360 lives and infected more than 17,000 across 23 countries. The World Health Organisation last week declared a global emergency. As for the Xi Jinping administration, it appears to be taking strong containment measures in what is the biggest threat yet to its popular legitimacy.
Looking back to 2003, the impact from the SARS virus on both daily life and financial markets was sharp, but ultimately short-lived. On equity markets, airlines in particular suffered, as they do today; but broader indices also took a hit last week, among them the FTSE 100, EURO STOXX 50 and Shanghai Composite — the virus has cancelled all this year’s gains on the S&P 500. A market fall, however, does not necessarily add up to a major global economic event.
“It’s important that investors don’t overreact to media reports that analyse the impact on individual economies,” said Chris Ralph, Chief Global Strategist at St. James’s Place. “At the time of writing, it would appear the major impact is on the Chinese economy, whereas the global impact is, as yet, small.”
Back in the corporate world, results season was fast upon us last week. Apple posted record earnings and sales; the company’s share price has doubled in just a year as sentiment has switched. McDonald’s and Microsoft were among the other major US highlights. US consumer confidence remains close to multi-year highs, particularly among those over 55, although spending has generally lagged sentiment since the 2016 presidential election. At the other end of the spectrum, however, Boeing’s woes continued to weigh on US markets; and are expected to weigh on US GDP, too.
Oil was another negative. Both Chevron and ExxonMobil reported unimpressive earnings, reflecting how oversupply has weighed on oil prices; global growth fears have provided a similar drag, taking oil majors share prices down too. Indeed, the S&P 500 Energy entered a technical bear market during January and continues to be the ugly duckling among the major S&P 500 sectors.
Those worried about growth may yet reflect that central bankers last week appeared ready to lend a hand. Meetings of the Fed and Bank of England (BoE) rate-setting committees may not have ended in rate cuts, but the prospect was undoubtedly dangled before investors. (The BoE lowered its GDP forecast for this year to just 0.8%.) Figures released on Thursday showed the US economy grew by an unspectacular 1.9% in the fourth quarter – further ammo for the doves at the Fed.
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