WeekWatch (12/08/2019)

It took just 22 minutes for Franky Zapata to hoverboard his way across the English Channel eight days ago under a clement sky. It was not an augur of things to come. In the week that followed, the gap between the UK and Continental Europe has only yawned wider and the global weather – political, economic and financial, as well as meteorological – has darkened. Investors responded by running for cover.

Although India’s decision to end Kashmiri autonomy caused an immediate outcry in Pakistan, perhaps the most combustible moment came in Hong Kong. The ongoing anti-Beijing protests, which trace their roots to the city’s ‘Umbrella Movement’ of 2014, spurred China’s leadership on the mainland to warn that the territory was “playing with fire” and edging close to “a very dangerous situation”. And yet, while the city’s Hang Seng index did drop in response, the slippage was more or less in line with the gradual decline it has been following over the past three weeks.

Besides, Beijing’s other relationships can affect the index’s fortunes too, and the Hang Seng – like the Shanghai Composite – opened the week much weaker than it had been just two trading days earlier, courtesy of President Trump’s decision to impose further tariffs on Chinese imports to the US. Last week, the US went one better (or worse), and labelled China a currency manipulator for the first time in 25 years, as the renminbi dipped below seven to the dollar. Beijing dismissed the accusation, placing the blame on “shifts in market dynamics” that include “escalating trade frictions” – although that could be read as a mealy-mouthed acknowledgment of manipulation.

As the renminbi (or yuan) tumbled, so too did a number of other Asian currencies, presenting a fresh puzzle for Washington, as the falls negate at least some of the impact of US tariffs on China. As for Asian countries not subject to US tariffs, their exports to the US just became still more competitive. The major exception to the rule was Japan’s yen, which has strengthened against the dollar since late August, in turn pushing down the TOPIX; but the latest figures did at least show Japanese growth coming in at 0.4% for the second quarter, four times the expected rate. Amid all these ructions across East Asia, there was a still bigger surprise, however: China’s exports actually rose 3.3% in July, following a fall in June, thanks to strong orders from Europe and Southeast Asia. Analysts expect the bounce to quickly lose momentum, and China’s producer price index did fall in July, as the tariffs pushed manufacturers to cut prices.

The FTSE 100 and EURO STOXX 50 both had middling weeks, but performance was overshadowed by the dip that had come with the latest US tariffs imposition. Moreover, as worries about trade wars weighed on markets, so too did worries about growth. Central bankers had, until recently, been looked to for dovish policies to support growth; but the extent of their recent dovishness has now begun to unnerve investors, who fear the soothsayers who sit on monetary policy committees must have spied too many storm clouds ahead. As a result, investors have been heading for the perceived safety of US Treasuries, the dollar, gold, the yen and the Swiss franc. Signs of growth in the eurozone are hardly encouraging: German car production has fallen off a cliff this year, dipping by around a sixth; German industrial production more broadly has also taken a dive; and eurozone growth slid to 0.2% in the second quarter. The ECB is now thought likely to be geeing itself up for further monetary stimulus in the autumn.

In the UK, however, growth clocked in negative for the second quarter, coming in at -0.2%; suggesting that a UK recession (usually defined as at least two consecutive quarters of negative growth) is at least plausible. It is now well-known that Brexit uncertainty has weighed on investment. Moreover, while the new prime minister is certainly forthright in his determination to leave the EU without any Irish backstop on 31 October, there are growing signs that MPs are going to make that outcome as difficult to achieve as possible. Furthermore, while the policy has undoubtedly energised Boris Johnson’s English base, polls suggested it is alienating voters in Scotland and Wales. Last week, the results of a poll commissioned by Lord Ashcroft were published; they showed that 52% of Scots now wish to leave the UK (up from below half previously) – for Unionists, an ominous echo of the percentage who voted for the UK to leave the EU.

Last week, Labour’s Shadow Chancellor publicly acknowledged that Scots might need the chance to decide for themselves; in the process, he alienated the Scottish Labour Party, which opposes a second vote on independence. Boris Johnson, on the other hand, has already alienated much of the Scottish Conservative Party with his push for a no-deal Brexit. But if politics isn’t crossing the border well, the prime minister is likely to be more focused on the prospect of a possible no-confidence vote in the Commons – only possible (pre-Brexit) during a five-day window in September; and on the prospect of a general election, which he has indicated could happen as the UK is leaving the EU. The suggestion has only added to his opponents’ determination to scupper his Brexit plans. They may be on holiday now but, come the autumn, MPs on both sides of the argument will need guts and guile in spades.

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