“It is a tale / Told by an idiot, full of sound and fury, / Signifying nothing.” Macbeth might have been talking about life, but similar sentiments are already being expressed about the Conservative leadership contest, which began last week.
At the last count, 13 MPs have announced themselves as candidates for the Tory leadership. Over the weekend, Sam Gyimah announced his own candidature, and said he would call a confirmatory referendum on Theresa May’s deal (with both ‘no deal’ and ‘remain’ on the ballot paper). Otherwise, candidates fall into two camps: those who say they would ultimately be willing to trigger a no-deal Brexit in October if no new deal is made; and those who say they wouldn’t – but will be able to deliver a much-improved version of the Withdrawal Agreement. It remains far from clear that either pledge could be followed through in reality.
When the full results of European elections were published last week, they showed a huge win in the UK for the Brexit Party. But among the major European countries, that populist surge was matched only in Italy. Matteo Salvini, Italy’s deputy prime minister and the leader of the Northern League, called last week for a “fiscal shock” of tax cuts to boost Italy’s growth.
The call came as a letter from the European Commission was wending its way to Rome, in which the Commission warned Italy was failing to make “sufficient progress towards compliance with the debt criterion”. While many economists disagree with Brussels’ stance on the issue, the yield on Italian debt rose last week in response to Salvini’s words – and the possibility of a penalty looms.
Beyond Italy and the UK, however, anti-EU parties fell short of their own electoral expectations.
“The fact that more populist or polarising parties like AfD in Germany or Le Pen’s party in France did less well than expected should help the UK’s Brexit negotiations,” said Chris Ralph, Chief Investment Officer at St. James’s Place. “Moreover, as Europe goes through a period when growth is slowing, having more political certainty and less extremism will be positive for investors.”
Markets worldwide had a difficult week, however. The S&P 500, FTSE 100, EURO STOXX 50 and Japan’s TOPIX all slipped over the five-day period, as global trade disputes and economic data both sapped investor enthusiasm.
Maersk, the world’s largest shipping company, reported on the negative hit suffered by global sea trade as a result of the trade war, as growth in the first quarter was less than a half the rate achieved in 2018. Trade war rhetoric between the White House and Beijing continued apace all the same. Indeed, the month of May as a whole was tough for markets from the moment Donald Trump published an incendiary tweet on trade on 5 May. Last week, China said it might retaliate by restricting US access to rare earth metals it buys from China – various rare earth metal companies saw their stock prices rise on these fears of supply reductions.
Such exports are important for the technology sector, which may in fact be the true reason for the US–China fall-out. After all, Alibaba last week chose Hong Kong over New York for its next listing (worth $20 billion). Meanwhile, in the same week Donald Trump made a state visit to Japan, Huawei was excluded from consideration for Japan’s 5G network building.
“In the US, there is a focus on achieving something on trade in time for presidential elections in 2020, but probably not yet,” said Chris Ralph. “China’s perspective is much, much longer, and is using its Belt and Road initiative to build relations with countries around the world. But this dispute is more about intellectual property and cyber security than trade itself, which isn’t necessarily being played out in the media headlines. I suspect this will go on into 2020.”
As it happened, Chinese stocks closed on Friday at the end of their worst monthly performance since October – even though the Shanghai Composite index actually ended last week higher.
In Europe, meanwhile, Fiat Chrysler confirmed that it is looking to merge with Renault, creating the world’s third-largest car manufacturer behind Volkswagen and Toyota. The planned merger may be complicated by Renault’s existing partnership with Nissan and Mitsubishi, which may have soured somewhat since the arrest of Carlos Ghosn, the former CEO of the Renault-Nissan-Mitsubishi Alliance.
Europe is perhaps particularly susceptible to the emerging trade war, and the European Central Bank’s vice president warned last week that a US–China trade war “could affect not only the volatility of markets, it could affect the real economy quite rapidly”.
The sense of trade relations worsening worldwide was heightened late last week when Donald Trump said the US would introduce a 5% tariff on imports from Mexico “until the illegal immigration problem is remedied” – a significant comment in its admission that tariffs are now being used for non-economic purposes too. Markets in Mexico fell in response, but the ripples were quickly felt in markets further afield.
In short, politics remains as important as ever – yet the level of media coverage should never be confused with true significance. In the week ahead, Donald Trump will make a state visit to the UK in a blitz of publicity – reports say his priority is to be received by the Queen, not the prime minister. In China, all media will be on lockdown to avoid any mention of the 30th anniversary of the Tiananmen Square crackdown.
The information contained is correct as at the date of the article. 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.
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