The constitutional set-up of the British Isles can be more than a little confusing, even for the British and the Irish, but it is hard to remember a time it has felt so relevant. Over the weekend, the status of Northern Ireland once again helped to scupper a prime minister’s plans, as the DUP voted in favour of Oliver Letwin’s blocking amendment, which had the effect of postponing the vote on Boris Johnson’s new deal.
Back in November 2018, Boris Johnson told the DUP conference that any regulatory or customs distinction between Britain and Northern Ireland would “be damaging the fabric of the union” and “no British Conservative government could or should sign up to any such an arrangement”. The DUP argues that the government, with its new deal, has done just that.
Trading this morning (Monday) did see the pound drop against the dollar as hopes of a swift deal dropped somewhat, which in turn pushed up the FTSE 100. Both shifts, however, were relatively contained, suggesting investors are not making any rash assumptions about outcomes – surely a wise course, particularly given parliament may yet approve the deal this week.
Much as Brexit continues to be felt on markets, it is the US and China that dominate the view. Last week, the two countries announced “phase one” of a new trade deal, according to which China will buy more US soybeans to the value of around an extra $40–50 billion – soya beans are the principal US export to China.
“We’ve had a skinny deal,” said David Riley, Chief Investment Strategist at BlueBay, which co-manages the Strategic Income fund. “I wonder why we’ve gone down this route if it boils down to China buying more soybeans. But even that temporary deal will relieve some of the uncertainty we’ve had and be positive for trade and manufacturing.”
The deal came at a good moment for sentiment, and the S&P 500 finished the week higher. Indeed, the news helped to temper the impact of other, less happy data. A report published last week by Alpine Macro showed that US fiscal policy is no longer stimulative, meaning the Trump tax cuts boost has now petered out. Furthermore, CEO sentiment in the US is on a marked decline and last week the Fed, in its Beige Book report, downgraded the US growth outlook. It has also begun buying up short-term government debt at a rate of $60 billion a month (technically not quantitative easing because it’s short-term debt, but investors are unlikely to complain).
“The yield curve is saying there is a one in three chance of the US going into recession in the next 12 months – and US recession means global recession,” said Riley. “We are already in an industrial
recession, not least in Germany and Korea. But the overall global economy is being held up by solid consumption and services, and consumer confidence has stayed high, even in Germany.”
The IMF last week downgraded its own global growth forecasts to 3% for the year, the slowest pace in a decade, and warned that, although central bank easing was helping matters, the banks had little dovish slack left to them. Meanwhile, official Chinese growth came in at just 6%. That makes any turnaround in US–China trade negotiations all the more positive for markets, although negotiators have just four weeks to find an agreed text.
“US–China negotiations have collapsed before, and it could happen again,” said Brian Horrigan, chief economist at Loomis Sayles. “Having said that, I am encouraged by the progress we’ve seen so far. I think the odds favour the successful conclusion of a small deal. If Trump and Xi sign in November, scheduled tariffs would likely be suspended, which would reduce uncertainty and boost economic optimism. I view a deal as positive for the US and global economy and financial markets.”
It was a positive week on markets for both Continental European and domestic UK stocks, too. In part, this reflected US–China momentum, but it also came on the heels of the UK and EU agreeing the new Brexit deal. News of that particular breakthrough sent sterling on a flyer, which in turn boosted the FTSE 250, and sent the FTSE 100 the opposite way (reflecting its high weighting of non-sterling earnings). The EURO STOXX 50 also ended the week up.
Not all the news was good. Domestic demand continued to drag in Germany, France and Spain, while Italy’s exports are struggling. The EU, the world’s second-largest importer of goods, is importing less than it was. In the UK, retail sales remain robust, but 56,000 jobs were shed in the three months to August and the IMF said the current government would not now succeed in balancing the budget until 2025.
At the time of writing, Brexit was set to move markets once again as, later today (Monday), John Bercow, Speaker of the House of Commons, was due to report whether he would allow a further vote on the government’s new Brexit deal.
BlueBay and Loomis Sayles are fund managers for St. James’s Place.
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