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WeekWatch (26/08/2019)

“Happy families are all alike; every unhappy family is unhappy in its own way”

So opened Tolstoy’s Anna Karenina, with a line that could all too easily be applied to ‘the European family’ just now – and this, despite evidence that support for the EU among its (non-British) citizens has increased since the 2016 referendum. Last week, things got no better. Boris Johnson wrote to Donald Tusk, President of the European Council, asking for the Irish backstop to be removed from the Withdrawal Agreement. Tusk refused. Johnson visited the French and German leaders last week; the former said the backstop was a non-negotiable; the latter might have offered softer rhetoric, but still said it was up to the UK prime minister to find an alternative. All the same, the suggestion that the Withdrawal Agreement could yet be amended in time for 31 October delivered a small boost to sterling late in the week.

The EU was arguably still more concerned by events in Rome, however. Last week Giuseppe Conte, Italy’s prime minister, resigned his position, and laid the blame for the current impasse at the feet of Matteo Salvini. Whether some kind of fresh coalition can be cobbled together quickly enough remains to be seen – there is talk of a coalition that would exclude Salvini’s Northern League. If it cannot, then Italy faces an election. The fact it would take place right in the middle of sensitive budget negotiations between Brussels and Rome is especially awkward – and potentially damaging.

“We don’t see the latest Italian political news as particularly significant, given the country’s rapid rotation of prime ministers in recent years, typically every one-two years – indeed, the spread between Italian and German sovereign yields suggests Italian country risk is broadly stable,” said Ken Hsia of Investec, manager of the St. James’s Place Continental European fund, and co-manager of the Greater European fund. “Despite weakening data globally, we find attractive bottom-up investments in Europe, in sectors such as healthcare, technology and online gaming.”

Troubles with London and Rome come, of course, amid signs of sagging European growth, not least in Germany. Last week, eurozone inflation for July came in at just 1%, its lowest level in two years. Berlin did at least suggest that it might be willing to countenance a rise in German debt levels in a bid to stave off recession; the share prices of European banks rallied in response.
Conversely, in the UK, the latest data showed retail sales 0.5% higher in the three months to July, which may be enough to keep the economy out of recession for the moment, despite the drop in business investment. But although business investment is down, it has hardly dried up. Last week, doubtless attracted by a weak pound, the Hong Kong businessman Victor Li paid £4.6 billion to purchase Greene King, the UK’s largest pubs and breweries group. Shares in the company soared 50% on the news. Mr Li is the son of the renowned Li Ka-Shing, Hong Kong’s richest man.

Li senior has suffered paper losses of $3 billion this year due to unrest in his home city. Hong Kong’s economy is sinking on falling business investment and consumption rates; new business from mainland China is falling especially fast, according to Bloomberg figures. Hong Kong’s currency peg to the dollar makes it especially reliant on Federal Reserve policy. Last week Carmen Reinhardt, a leading authority on the global financial crisis, told media that, given Hong Kong’s significance to East Asia’s economies, the current problems in the city could ultimately spark a global recession.

Those hoping for a hand from central banks last week received mixed messages. China adjusted the process for how its banks set their lending rates, which had the effect of introducing a broader rate cut. Investors shifted from bonds to stocks in response, believing this would just be the start. However, the publication of minutes from the Federal Reserve’s last rate-setting meeting showed that committee was split over its rate decision; it is far from certain the Fed will offer any easing in September.

President Trump was typically forthright in his view of the Fed’s deliberations, questioning whether Chair Jay Powell was a bigger enemy of the US than China’s Chairman Xi. One possible answer came on Friday, when China announced $75 billion of tariffs on US imports. After a fairly steady week up to that point, the news sent markets tumbling. The US duly responded, saying it would begin the process of raising tariffs on $250 billion of Chinese imports from 25% to 30% from 1 October.

Yet amid the escalating tension, President Trump claimed on Monday that the two countries would resume trade talks “very shortly”. Despite the more conciliatory comments, markets started the week in mixed moods. Investors remain nervous, and unconvinced.

Investec is a fund manager for St. James’s Place.

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