WeekWatch (08/07/2019)

As ever on 4th July, skies across the US were lit up with firework displays commemorating the anniversary of the Declaration of Independence. The largest display was in New York; the $6 million show included more than 75,000 individual shells, lasted more than 25 minutes and took 55 crew members ten days to set up.

There had already been fireworks on markets. “S&P 500 hits new record high. Up 19% for the year. Congratulations! We have the greatest economy anywhere in the world,” tweeted President Donald Trump on Wednesday, mirroring the nationalistic fervour.

In many respects, he had good reason to cheer, as the US market continued to bask in the afterglow of the ‘ceasefire’ in the trade war between the US and China; the S&P 500 has had its best first half of the year since 1997. Indeed, the US economic expansion in the aftermath of the global financial crisis officially made history on Monday. The 121-month expansion that began in June 2009 is now the longest ever, breaking the run from 1991 to 2001 which was ended by the bursting of the dotcom bubble.

Despite the current expansion being a record breaker, it has been one of the slowest. The US economy has grown 25% cumulatively since the start of the expansion, which is less than any previous booms. Similarly, although job growth has also been slower than recoveries of yesteryear, the unemployment rate now sits at 3.6%, its lowest for 50 years.

But President Trump may come to regret the bombastic tweets, as bond markets have not shared the equity market’s mood. The yield on the US 10-year Treasury dropped below 2%, leading to an inversion of the yield curve, historically a precursor to recession. Trade fears were also heightened as Trump turned his fire from China to Europe. He signalled that he is likely to expand tariffs against eurozone countries on $4 billion of goods as part of a battle over aviation subsidies.

“The more hostile and uncertain trading environment is coinciding with sharp slowdowns in global trade, manufacturing, industrial production and capital goods orders,” warned Bank of England governor, Mark Carney. “Across the G7, the growth rate of business investment has almost halved since its peak in late 2017, leaving the global expansion more reliant on consumer spending and reducing its resilience.”

Carney will be leaving his role in January, but suggested he fears the UK economy could be pushed off course by the disputes: “Whether current trade tensions shipwreck the global economy or prove to be a tempest in a teacup will have an important influence on the outlook for growth and inflation in the UK.”

When he eventually departs, the job he may have his eye on is to be head of the International Monetary Fund, as the incumbent Christine Lagarde is set to be appointed as president of the European Central Bank.

Her impending appointment was greeted positively on equity markets, as hopes rise of a fresh stimulus package and monetary easing for the eurozone economy. The FTSE 100, CAC 40 and DAX 30 all rose, before falling back. Bond markets meanwhile saw borrowing rates dip, tipping German 10-year bond yields into negative territory; Italian two-year bond yields did likewise for the first time in over a year. In short, investors are preferring a guaranteed loss in government bonds to the perceived uncertainties of equities.

Carney’s warnings prompted 10-year gilt yields to fall below the Bank of England base rate for the first time in a decade, as markets priced in a rate cut by summer next year. Moneyfacts reported that June saw savings account providers cut long-term fixed rates by the biggest amount since November 2016 in anticipation of the move. Across the pond, the US Federal Reserve has suggested it may mirror the dovishness of the Bank of England and ECB and cut interest rates by up to 0.5% to support the US economy.

Other top EU appointments were perhaps more controversial than Lagarde’s, with late night summits outlasting even those concerning the Greek bailout in 2015. Despite not being one of the preferred final three candidates, German defence minister Ursula von der Leyen has been nominated to replace Jean-Claude Juncker as president of the European Commission. The Belgian prime minister, Charles Michel, will replace Donald Tusk as president of the European Council in December. The EU’s new top team will be tasked with leading the EU’s policies over the next five years on areas such as climate change, migration and trade. Importantly, they will also have to negotiate with either Jeremy Hunt or Boris Johnson if the prime ministerial contenders fail to deliver Brexit by 31 October.

The new premier may suffer an early setback, as the closely watched IHS Markit services sector survey suggested the UK economy has suffered its first quarterly contraction in seven years. This is on the back of no-deal Brexit fears, paralysis in the previously dominant services sector, and a six-and-a-half-year low in manufacturing.

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