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WeekWatch (15/07/2019)

WeekWatch (15/07/2019)

Well, so much for the ‘special relationship’. UK ambassador Kim Darroch resigned on Wednesday following leaks of confidential communications in which he described the Trump administration as “inept” and “uniquely dysfunctional”. Trump’s rather more public denouncement of Darroch as “wacky”, “pompous” and “very stupid”, coupled with the lack of immediate support from prime ministerial hopeful Boris Johnson, persuaded the envoy to quit.

One man who wouldn’t be cowed by the president is the most powerful central banker in the world, Jerome Powell. The chair of the Federal Reserve said on Tuesday: “The law clearly gives me a four-year term and I fully intend to serve it.” Trump has spent several weeks piling pressure on Powell to adopt a more dovish stance and bolster the US economy with an interest rate cut.

It was a slow start to the week, as better-than-expected job results prompted fears Powell may delay a rate cut beyond July, and yet US markets continued to break records. The CME FedWatch Tool showed that traders have priced in a 100% probability of a US rate cut this month, supporting the market’s continued confidence.

The bull run is already the longest ever recorded and the S&P 500 and Dow Jones both hit new peaks last week. After leading the losses on Monday, technology stocks drove the S&P higher and have continually proven to be a bulwark this year for Wall Street. The sector is up around 28% in 2019 and is outperforming the S&P 500 by around 10%. Although calls for the anticipated cut will continue to grow, the US Consumer Price Index – a widely followed measure of inflation – posted its biggest gain in 18 months on Wednesday and gave the Fed food for thought as to the scale and timing of the rate move.

On this side of the pond, interest rates were also on the agenda as a member of the Bank of England’s Monetary Policy Committee (MPC) suggested that rates could be cut to below 0.25% in the event of a no-deal Brexit. But the MPC said that, if a Brexit deal was struck, it could lead to rates rising to 1% within the next 12 months, potentially offering a boost to investors.

The Bank of England also detailed improved contingencies in place within the banking sector in the event of a no-deal Brexit. The Financial Policy Committee reported: “Even if a protectionist-driven global slowdown were to spill over to the UK at the same time as a worst-case disorderly Brexit, the core UK banking system would be strong enough to absorb, rather than amplify, the resulting economic shocks.”

However, an ongoing headache is posed by the pound. It hit a two-year low against the dollar and a six-month low against the euro last week. One person who may feel it in his pocket is Wimbledon men’s singles champion Novak Djokovic. If the Serb converts his £2.35 million winnings to his native Serbian dinar, he will take home around £150,000 less than he would have done had the tournament been held in March. Ongoing Brexit concerns have been blamed for the weakness of sterling in recent months, although the FTSE 100, which is very much a global index, failed to see much of an uplift and was slightly down for the week.

The fall in sterling has hit holidaymakers as schools begin to finish for the summer and many will also be anxiously checking for updates on Thomas Cook. The travel company insists that customers’ holidays are secure, despite it seeking a £750 million rescue package from its largest shareholder. The retail sector has also suffered: the British Retail Consortium showed average sales growth slowed to 0.6% in the 12 months to June, the weakest reading since its records began in 1995.

This slew of negative data has led economists, according to a Bloomberg survey, to forecast a contraction in the UK economy during the second quarter; it would be the first quarterly contraction since 2012. However, month-on-month GDP results up to the end of May indicated a better-than-expected jump of 0.3% for the UK. It was a similar story in Continental Europe, where hopes of staving off a recession were boosted by news that industrial production in the eurozone was up 0.9% from last month. Despite this figure being 0.5% lower than a year earlier, Capital Economics believes that it should “allay concerns about the wider economy falling into recession”.

Any relief on the global outlook may be short-lived, although, as reports from a survey by the Association for Financial Professionals suggest that China grew at its slowest rate in nearly three decades in the second quarter. The poll indicated that world’s second-largest economy expanded by 6.2%. Yet the consequences of the trade war may be exaggerated, as Chinese exports fell less in June than anticipated, while retail sales and industrial production both outperformed forecasts. The main Asian markets closed the week slightly higher.

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