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WeekWatch (29/07/2019)

WeekWatch (29/07/2019)

The ‘blond bombshell’ finally has the keys to 10 Downing Street. Having won the Conservative Party leadership contest with 66% of the vote, Boris Johnson entered through the famous black door on Wednesday afternoon.

He will have been greeted by Larry the cat. The ‘Chief Mouser to the Cabinet Office’ has been at 10 Downing Street since 2011 and has already outlasted two prime ministers. Considering Johnson has inherited a wafer-thin parliamentary majority, endured protests before even starting his new job, and has put a squad of high-profile players on the back benches, don’t bet against Larry seeing off a third.

The new prime minister made a typically bombastic start. “The people who bet against Britain are going to lose their shirts because we are going to restore trust in our democracy, and we are going to fulfil the repeated promises of parliament to the people and come out of the EU on October 31, no ifs or buts,” he said in his maiden speech. This was followed by one of the most brutal culls of senior government figures ever; as more than half the members of Cabinet were sacked or chose to resign before they were pushed.

Johnson did overcome the first hurdle – he survived until the parliamentary recess without Labour calling a vote of no confidence in his leadership. However, the scrutiny of his Brexit position is unlikely to subside. Nigel Farage, leader of The Brexit Party, made overtures about an electoral pact and the Liberal Democrats’ new leader, Jo Swinson, promised to fight a no-deal Brexit every step of the way.

There are fewer than 100 days until 31 October and the UK’s scheduled departure from the EU. Azad Zangana, the senior European economist at Schroders, does not expect a definitive outcome by then. “Given the low likelihood of a successful renegotiation, the most likely outcome is therefore another delay. Johnson’s ‘do or die’ promise during his campaign simply lacks credibility,” said Zangana.

Johnson’s new chancellor, Sajid Javid, may also have a busy few weeks. After years of austerity, Johnson will be keen to deliver on his campaign promise to loosen fiscal policy; public spending as a share of GDP is at its lowest level since 2004. There have been rumours of an emergency (and generous) Budget in September, ahead of Brexit; but the summer recess and autumn party conference may squeeze it out. With Johnson’s victory priced in, markets initially brushed off the week’s upheaval; the FTSE 100 was flat for the week; and sterling seemed impervious – until this morning, when it struck a two-year low against the dollar.

President Trump was one of the first to offer his congratulations, referring to Johnson as “Britain Trump”. Back at home, there was less for him to celebrate; revised figures showed that the US economy only grew at 2.5% – well below the president’s 3% target. Second-quarter growth slowed to 2.1% (annualised). Jay Powell, Chair of the Federal Reserve, will have to consider whether this sluggish growth impacts the scale of an anticipated interest rate cut when the Fed meets tomorrow.

He may also be wary of a mixed earnings season for many companies this week. Alphabet, the parent company of Google and YouTube, saw its after-tax profits triple compared to a year ago, while its revenues rose 19%, beating expectations. Amazon’s results, on the other hand, fell below analyst expectations despite increased revenues; a disappointment after four consecutive quarters of record profits.

Indeed, despite buoyant stock markets and a fresh high for the S&P 500, the growth outlook remains uncertain. “What we’re looking at today is a position where the valuation on the US market isn’t actually at stratospheric levels and nowhere near where it was at 1987 or 1929 [when the market crashed],” said Chris Ralph, Chief Investment Officer at St. James’s Place. “But if we move into the third and fourth quarter and companies start missing on their earnings targets, then people are going to get more worried.”

The International Monetary Fund cut its growth forecasts for the global economy this year and next – as it did for the US. But it upped its growth forecast for 2019 for the UK, and even raised its 2020 forecast, although only on the basis of an orderly Brexit; a no-deal Brexit was named as one of the biggest threats to global growth. The National Institute of Economic and Social Research said the mounting risk of a no-deal Brexit means there is a 25% chance the UK is already in a recession and predicts GDP has fallen 0.1% in the second quarter.

Fears of stagnation are encouraging the European Central Bank (ECB) to cut interest rates and resume quantitative easing. A key measure of eurozone manufacturing growth fell to a seven- year low, and eurozone inflation is significantly below target. Last week, ECB president Mario Draghi said that, since “the outlook is getting worse and worse”, interest rates would not rise until mid-2020 at the earliest.

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

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