WeekWatch (05/08/2019)

Back in 2008, an eloquent British journalist and politician wrote that the drop in sterling during the holiday season was no less than “the definition of a national humiliation”, placing the blame squarely on the then-Labour administration.

Fast forward 11 years and the journalist is now prime minister – and last week presided over its decline to a 30-month low against the dollar, ending a tough month for the currency. But, then, it’s easy for journalists to carp; leaders have to govern and, as the postwar French politician Pierre Mendès France put it: “To govern is to choose”.

Boris Johnson certainly seems willing to choose. Last week, while professing affection for the Union, he nevertheless made clear that he would not countenance the Irish backstop; and would only negotiate with the EU as and when it showed willingness to ditch it. Indeed, he rejected invitations for meetings with both the French president and German chancellor.

Relations between Downing Street and leaders in Edinburgh, Cardiff and Dublin looked little warmer, despite Johnson’s official visits – Belfast was the one exception (albeit only on the DUP side). An increasing number of leaders spoke out about the possibility of secession from the UK, perhaps encouraged by recent polling. At the other end of the spectrum of possible outcomes, Downing Street acknowledged that direct rule of Northern Ireland is now a possibility.

While the prime minister continued to express a preference for a deal prior to exiting the EU, Michael Gove said a no-deal outcome was now the working assumption and Sajid Javid ordered HMRC to make no-deal preparation its “absolute top priority”.

If this is merely the mother of all bluffs – as some commentators believe – then someone had better tell investors; not only was the pound down last week but the yield on UK government 10-year debt dipped to an almost three-year low – another indicator that investors are running for safety. Banks and hedge funds, moreover, have started increasing their bets against the pound. Johnson’s capacity to deliver on his pledges may also depend on his Commons majority, of course, and last week’s by-election saw that cut to just one.

“The pound’s fall is all down to the new British government and [Boris Johnson’s] “do or die” Brexit campaign,” said Nick Andrews of Gavekal Economics. “Currency markets are spooked but it is most likely just a negotiating tactic. When a deal is finally struck, Britain’s strong economic fundamentals mean it is well placed for a boost in growth, along with the pound.

But since this is not the mainstream view on markets, many expected the Bank of England to raise interest rates last week. Instead, the Monetary Policy Committee declined to run to the rescue, instead leaving rates unchanged and warning that the UK had a one in three chance of recession at the start of 2020.

The FTSE 100 dropped for the week, although this had little to do with politics; after all, a fall for sterling tends to flatter the index. Instead, worries over global growth, trade and earnings weighed on sentiment across global indices, including in the UK. Companies continued to report a range of results: Alphabet overtook Apple as the company with the largest cash reserves worldwide; Apple itself reported better-than-expected results; Aston Martin reported losses for the first half of the year; Shell saw its profits dip a quarter on price declines for liquefied natural gas; BAT had a strong three months; and Toyota cut its profit forecast, citing the strength of the yen (which tends to be a haven for nervy investors).

But the biggest news for markets came in the form of the Federal Reserve cutting interest rates for the first time since the global financial crisis and Donald Trump announcing the imposition of a 10% tariff on $300 billion of Chinese imports. The Fed cut came in at 0.25%, as expected – a smaller cut than the president had hoped for; and one the bank said was due to trade tensions and “uncertainties” in the global economy. The Fed hinted at further easing to come and Bloomberg data shows that markets are now convinced a second cut is coming next month. The US jobs report showed a slowing rate of growth, but hardly a disastrous one. Moreover, data from Europe last week added to the impression that the US economy is performing much more strongly than those of the UK and eurozone.

While the S&P 500 held through most of the week, perhaps propped up by the Fed’s offer of support, Donald Trump did for it on Friday with his tariffs announcement. China’s Shanghai Composite index fell in response, as did emerging markets more broadly, although the latter’s slide should be viewed in the context of a strong year for emerging market equities.

China was not alone in Asia in feeling the heat of trade hostility, but its own response came in the form of allowing the renminbi to weaken; the currency this morning struck an 11-year low against the dollar. South Korea found itself removed from Japan’s ‘white list’ of export-approved countries over a dispute about wartime labour. South Korea’s KOSPI and Japan’s TOPIX indices both ended the week down.

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