WeekWatch (20/05/2019)

If you want a shorthand for which way the Brexit winds are blowing, look no further than sterling.

The pound finished the week more than 2% down against the dollar, marking its worst week in a year and taking it to a four-month low. Friday also marked a tenth day of declines for the currency. In many ways, it was merely tracking the stock of the prime minister, who seems now to have reached her endgame. Under pressure from her party, she last week agreed that – if she can’t get her deal through parliament – she will be out before the summer recess, which begins on 20 July. Most pundits think she’ll be out before the covers come off for the first day of Wimbledon.

Now that talks with the Labour Party have broken down, the week commencing 3 June is when she must present the Commons with more or less the same Withdrawal Agreement it has already voted down three times. Remainers and Brexiters alike have their reasons to reject the deal once more, whether on hopes of no Brexit or of a cleaner exit.

As if that wasn’t enough, this Thursday she faces a potentially brutal round of European elections. Polls suggest the Labour Party will also suffer, with its pursuit of the middle ground seemingly unpopular. While the Conservatives are expected to leak seats to the Brexit Party, Labour is expected to suffer most at the hands of the Greens, the Liberal Democrats and Change UK.

Amid the political swings, the UK jobless rate last week struck a 45-year low. However, employment only increased by 99,000 jobs, against an expected 140,000. Moreover, the rise was mostly driven by self-employment; full-time employment actually dropped by 55,000. Headline pay growth also slipped slightly due to lower bonus payments.

The UK economy enjoyed a strong first quarter, growing 0.5%, although stockpiling was a major factor in the figure, pointing to pre-Brexit preparations rather than demand-driven growth. Yet investors were reminded of the benefits of the UK stock market’s global reach, as a falling sterling pushed up the value of UK-listed stocks, thanks to the preponderance of overseas earnings represented on the FTSE 100.

In that sense, the UK market was an outlier. In the US, stocks suffered their biggest one-day loss since 3 January, as trade talks between the US and China finally broke down. After Washington identified nearly $300 billion of new Chinese imports that would face 25% levies as early as this summer, Beijing retaliated with plans to increase levies on $60 billion of US imports. The US said it was intending to impose tariffs on all remaining Chinese imports to the US.

Both the S&P 500 and the Dow Jones Industrial Average fell in response, taking many other leading indices down with them, not least Japan’s TOPIX. (Perhaps more importantly for Japan, however, first quarter GDP growth came in at 2.1% annualised – a contraction had been expected.) The tariffs on China are expected to hit the automotive and parts sectors, in Japan as well as in China; Japan also faces the prospect of US tariffs on its own automotive parts sector six months’ hence.

The plot thickened when the US president signed an executive order enabling the US to ban telecoms equipment from “foreign adversaries”. Moreover, the commerce department said it would add Huawei to a list of entities undertaking activities contrary to US interests. The measure would limit sales or transfers of technology to Huawei – US semiconductor companies suffered share price falls in response. Over the weekend, Google suspended access to some Huawei apps on its Android system – a hugely damaging blow to Huawei, should the policy remain in place. Meanwhile, San Francisco became the first American city to ban facial recognition software; WhatsApp reported a security flaw that allows hackers to install surveillance software on smartphones; and the Supreme Court gave the go-ahead for iPhone users to sue Apple over enjoying an unfair apps monopoly. Despite these moves, the tech-heavy Nasdaq index ended the week relatively flat. US indices are at least being aided by their constituent companies, which have been buying back their own shares at a rate of knots for the past year.

Despite the US–China ructions, the Shanghai Composite index also ended the week relatively flat, but this may have owed something to the fact that Beijing has chosen to allow the renminbi to drop in value more rapidly in recent days – doubtless in response to the US’s hard line on trade.

While Europe could be somewhat convulsed by its European Parliament elections this week, those in India may well matter more to markets. The result, due to be announced on 23 May, is expected to fall in favour of the incumbent, Narendra Modi, whose popularity recently rose when he responded to cross-border terror attacks by sending planes across the Pakistan border. Foreign investors have certainly warmed to India lately putting, during Modi’s tenure, a net $25 billion into Indian equities – and $30 billion into bonds – even as emerging markets more broadly have struggled.

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