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WeekWatch (24/06/2019)

WeekWatch (24/06/2019)

Someone, it seems, is bluffing.

Last week, Conservative MPs whittled down their leadership contenders to just two. Both candidates argue they can negotiate a new and better Brexit deal, and one of them claims he can agree it before the deadline of 31 October; the EU, meanwhile, says it will not negotiate a new deal. One contender says he is willing to take the UK out of the EU without a deal on 31 October; the Speaker of the House of Commons, meanwhile, says parliament would block a no-deal exit. Who should we believe?

The market delivered its own answer, of a kind. Investors took what they see as the rising risk of a no-deal Brexit seriously enough to push sterling down to its lowest level in six months. The pound has now lost almost 5% of its value against the dollar since the start of May. Of course, that didn’t do the FTSE 100 any harm, given its heavy weighting of foreign earnings. The index had a strong week.

Global markets, on the other hand, moved on from Brexit long ago. The results of a poll conducted by BlackRock were published last week. They showed that, whereas a little under 15% of investors thought geopolitics and trade would be the chief driver of market performance in 2018; this year that number has risen to 45%. Fiscal and monetary policy, on the other hand, was seen as the primary driver by more than 40% last year and is down this year to little more than 30%. Both factors held the headlines last week.

Donald Trump offered hints that a new US–China trade deal could yet be in the offing, delivering stocks a boost in the process; the S&P 500 had a good five-day period. The onus now falls on Japan, chair of the forthcoming G20 in Osaka, to encourage the two powers to shift from words to action – the summit begins on Friday. Market participants were less encouraged by the trajectory of the US–Iran relationship. The US committed 1,000 more troops to the Middle East; meanwhile, Iran shot down a US drone over the Strait of Hormuz. Trump warned that Tehran had made a “very bad mistake”, ordered a strike, and then cancelled the order.

Meanwhile, it was a week for judges to rock the geopolitical boat. A Dutch court ended four years of deliberations when it delivered a guilty verdict for four Russian-based separatists (three of them Russian, one Ukrainian) accused of shooting down a commercial passenger plane in Ukraine in 2014; the Kremlin immediately disavowed the ruling. And the Court of Appeal in London ruled that the government needed to assess whether Saudi Arabia had violated human rights in its military campaign in Yemen – site of the what the UN calls the world’s worst humanitarian crisis – before further arms sales are approved. The UK, 40% of whose arms exports go to Riyadh, will offer no new Saudi export licences for the moment.

The desert kingdom has other worries. Last week, the UN released “credible evidence” that the Saudi crown prince was behind the killing of the journalist Jamal Khashoggi last year in the Saudi embassy in Turkey. It is also preparing its state oil giant, Saudi Aramco, for a delayed listing, and has now begun to crack down on the ministerial gravy train, as it tries to persuade potential investors that Aramco, which would be the world’s largest listed company, can develop good corporate governance practices.

Central banks, on the other hand, are if anything loosening the purse strings. On Thursday, the Federal Reserve left interest rates unchanged and opened the door to a rate cut in the near future; the yield on the 10-year US Treasury dipped almost down to 2% last week as investors continue to head for the safety of government bonds. The European Central Bank held its annual forum in Portugal last week, and Mario Draghi said that cutting interest rates further was indeed an option; he even announced that there is “considerable headroom” for the ECB to buy new bonds. The euro dropped in response, boosting eurozone stocks and corporate bonds. Not to be left out, Mark Carney, Governor of the Bank of England, expressed the BoE’s willingness to cut rates to “a little above” 0% to help the economy in the event of a no-deal Brexit, precipitating a rally for gilts. But the greater surprise came in the announcement that the Bank will open its vaults to tech companies so as to better regulate digital currencies – Facebook last week announced the launch of its own cryptocurrency, Libra.

And finally, sometimes even the auctioneer gets auctioned off. Sotheby’s was last week sold off for $3.7 billion. The news ensured a nice stock price bounce for its investors; the world’s fourth-oldest auction house will now be taken into private ownership.

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