World in a Week

The World In A Week 39 – Is This The Beginning Of The End?

The election machines for the main political parties rolled into action last week, and with just 31 days until the general election, politicians are keen to get their messages across, while taking carefully worded pot-shots at the opposition.

This meant that Parliament was officially dissolved on Tuesday so electioneering could commence the following day.  However, the relief from Brexit and UK politics will be short-lived, as whatever the outcome of the general election, uncertainty will continue to prevail for the UK.

According to YouGov’s political tracker, the Conservatives lead in the poll with 39%, while Labour sits second with 26%, up from 21% at the beginning of the month.  It should come as no surprise, that with 59% of the poll, the most important issue to voters is Britain leaving the EU.

If the polls are correct, which based on recent experience is wildly optimistic, then we may see a Conservative majority.  That could mean Brexit takes place on or before 31st January 2020.  The uncertainty here is the original transition period is due to finish at the end of 2020, which does not give much time to complete a comprehensive trade deal with the EU.  Anything other than a Conservative majority would bring the uncertainty around Brexit front and centre.

Trade is also in the headlines across the Atlantic, with both the US and China having confirmed that if a phase one trade agreement happens, then it would include some reductions in tariffs.  Whether this is a reduction in the actual tax rate or in the number of goods being taxed, was unclear.  However, the time being taken around the negotiations does suggest a significant deal is in the pipeline.

It would seem the timing is equally convenient for both Presidents; one needs a good story to tweet about as his impeachment gains momentum, while the other needs to replenish his countries pork reserves.  According to UBS China’s pork prices have soared 100% over the past 12 months, as the country has had to cull its pigs in the face of African Swine Fever.  Pork is the most consumed meat in China and its importance cannot be understated.

Jon DoyleThe World In A Week 39 – Is This The Beginning Of The End?
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The World In A Week 38 – The New Boss, Same As The Old Boss?

It was a relatively sedate week in financial markets, as Sterling strengthened against most major global currencies. Equities were up slightly in GBP terms, while Fixed Income also rose by +0.25% in GBP hedged terms. Brexit related metrics were largely unchanged, as markets await the results of the forthcoming festive election. Global bonds maintained their gains vs Sterling bonds, as did domestically-focused UK equities vs their more international peers. The Dollar has begun to weaken against its main trading partners, which has given a nice boost to our local currency emerging market debt holdings.

One of the major developments in the world of finance was the changing of the guard at the European Central Bank. Christine Lagarde took over the position of President of the ECB from Mario Draghi. She begins her tenure at a time when storm clouds gather over the Eurozone economy and the monetary policy tools at her disposal are less and less effective at boosting economic growth. In that sense, Mr Draghi may have picked an opportune time to depart, as much of Madame Lagarde’s political capital will likely be expended in trying to convince the creditor nations of the Eurozone (namely Germany) to enact a fiscal stimulus to pick up the reins from monetary policy. This is not a task many would envy…

Jon DoyleThe World In A Week 38 – The New Boss, Same As The Old Boss?
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The World In A Week 37 – On, and On and On…

Brexit shenanigans dominated the headlines last week as the UK’s departure from the EU drags on, and on, and on. While Prime Minister Johnson eventually reached a majority agreement, it failed to go to a vote in the House of Commons over the weekend as MPs deemed the narrow window of, 3 days, too narrow. The EU will now decide on allowing a further delay beyond the deadline of 31st October. In the meantime, Johnson has called for elections to be held on 12th December, the last day that community halls and other social spaces are available before the festive period; a two-thirds majority would be required for the vote to go ahead.

Central banks held little surprises; in his last appearance as Chair of the ECB, Mario Draghi remained dovish in his final address. While Draghi will formally hand over the reins to his successor this week, we look back to his famous speech in 2012, where he promised to do “whatever it takes” to save the Euro and he will leave the ECB having achieved this. In the week ahead, the US Federal Reserve meets on 29th, consensus is that there will be a further cut to interest rates.

Economic data last week was mixed; the Eurozone edged marginally higher from a reading of 50.1 in September to 50.2 in October, hanging on the expansionary territory, however, underlying data showed that France had done better than expected while Germany continues to slow. In the US, PMI preliminary data moved up from 51 to 51.2, despite disappointing durable goods orders.

Results season in the US was more positive; with a third of companies’ data now available, over 80% surprised to the upside pushing growth rates cautiously in to positive territory. It was a similar story in Europe, with more positive surprises than negative news, however, growth struggled and was marginally negative.

Jon DoyleThe World In A Week 37 – On, and On and On…
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The World In A Week 36 – Nine Lives

Another week where politics dominated the markets.  It started with news that the US and China had reached a ‘phase one’ trade agreement, which boils down to being a truce.  For the time being the US has agreed to suspend the increases in tariffs and China has agreed to increase their agricultural purchases.  The key date is the Asia Pacific Economic Cooperation (APEC) summit in mid-November, where the deal is set to be concluded.

It is good news that the trade war is de-escalating, however we do expect further bumps along the way, especially as the US has just passed legislation supporting the pro-democracy protests in Hong Kong.  Will this political disagreement complicate the delicate trade negotiations?

When it comes to complicated, the UK is building a monopoly.  Having already lost eight commons votes since becoming Prime Minister, Boris Johnson made it nine with defeat on Saturday, a record not seen since Lord Rosebery in 1894.

Without the will of the politicians, any deal is doomed to failure.  The addiction to avoid decision has become the modern malaise and with the narrow defeat on Saturday, Boris Johnson was forced to write to the EU to request an extension to Article 50.  Even that simple task was laced with confusion and ulterior motives.

What we do know, is that geopolitics is not going to get any clearer any time soon.  We know we have a US Presidential election next year, but the outcome is far from clear.  While in the UK, we do not know what next year has in store; a referendum, a general election or some clarity over our exit from the EU?

That is why our investments continue to be appropriately diversified in these interesting times.

Jon DoyleThe World In A Week 36 – Nine Lives
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The World In A Week 35 – Inching Towards A Deal

It was a rather lively week in financial markets, from the perspective of a UK-based investor. Sterling strengthened considerably against all major currencies, as markets anticipated a break-through in the long march to a Brexit deal. As Sterling strengthened, Global Equities as measured by MSCI ACWI were down -2.7% in GBP terms and the FTSE All Share index of UK Equities rose +1.61%. On the Fixed Income side of our portfolios, Global Bonds hedged to GBP returned -0.9% – but this considerably outperformed Sterling Bonds which returned -1.75% for the week.

Market developments were primarily driven by tentative advances in negotiations surrounding two prospective deals. Of major global importance, is the ongoing trade dispute between China and the US. Markets reacted favourably to news on Friday that the US had agreed a limited “phase one”  trade deal with China which would delay tariff increases scheduled for this week. The agreement was positive, but light on detail and is widely seen as a truce in the ongoing trade war.

Closer to home, an outburst of optimism regarding the possibilities of a Brexit deal shot through financial markets towards the end of the week. The Irish Taoiseach, Leo Varadkar, met with Boris Johnson in 11th hour talks. Much was made of the reaffirmation of the possibility of a Brexit deal, even at this late stage. Sterling and UK assets rallied strongly on the news, and we expect volatility to persist into next week following the Queen’s speech on Monday.

Jon DoyleThe World In A Week 35 – Inching Towards A Deal
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The World In A Week 34 – Elephant In The Room

Last week, ISM data was released, this is a measure of new orders, production, employment, supplier deliveries and inventories; in essence, a measure of productivity. The key number to be cognisant of is 50, above 50 indicates an economy is in expansionary territory, below 50 indicates contraction and potential recession. Data for US and China did not make for happy reading, with German manufacturing data especially worrying, falling to 45.7 from 47.

While contraction has been evident for several months in bond markets, it has taken some time for this to filter through to equity markets, which had a negative week; in Sterling terms, most indices fell sharply midweek, limping back towards positive territory by Friday. In the US, ISM data plumbed the lowest depths in 3-years, heightening expectations of a further interest rate cut of 25bps this month, and a fourth rate cut probability of 50-50 by year-end.

On the tedium that is Brexit, there was little news. The next key date in the Brexit calendar is 19th October, when a deal must be agreed by Parliament; MP’s are expected to agree to a no-deal Brexit, which we believe is highly unlikely and will result in the Benn Act being employed, which will anger hard-Brexiteers. The Benn Act was passed last month and requires the Prime Minister to ask for an extension to the Article 50 negotiating period, which would avoid a no-deal Brexit on 31st October.

Chinese equity markets reopen this week following celebrations marking the 70th anniversary of the Popular Republic. Investors will be keenly focussed on US-China statements ahead of their meeting on 10th-11th October in Washington, where trade talks will recommence.

Jon DoyleThe World In A Week 34 – Elephant In The Room
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The World In A Week 33 – Getting Our Priorities Straight

The UK Supreme Court ruled that the prorogation of Parliament by Boris Johnson was unlawful, which resulted in a swift restarting of Parliament last week.  It would appear the battling forces within British politics are becoming more entrenched and the cross-party support needed to strike a deal with the EU fading.  A request to extend the deadline for Article 50 is now most likely, after which we can expect an election or fresh referendum.

Politics escalated even further in the US, with an announcement of the start of an impeachment enquiry into the actions of President Trump.  This is centred around a telephone call with President Zelensky of Ukraine, in which it is alleged that Trump asked for an investigation into the activities of the son of Joe Biden, who just happens to be one of the front runners for next year’s Presidential election.

The process is as much political as it is legal, with proceedings needing to pass through both the House and the Senate; the latter being controlled by the Republicans, with a two-thirds majority.  It is worth remembering that a President has never actually been impeached; although it was a close shave for President Nixon, who resigned before Congress could vote him out of office.

So, with global data suggesting that growth is slowly dissipating and in much need of both fiscal and monetary stimulus, the governments either side of the Atlantic seem to currently prefer the distraction of playing politics.

Jon DoyleThe World In A Week 33 – Getting Our Priorities Straight
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The World In A Week 32 – Judgement Day

Geopolitical tensions escalated last week following the attack on Saudi Arabia’s oil production facilities. It has been estimated that the attack destroyed c.50% of Saudi production, although there were assured statements from the capital that oil exports would be maintained, and lost capacity would be expediently rebuilt. Following a huge initial jump in the oil price, volatility in the commodity subsided towards the end of last week. However, while the volatility in the oil price subsided, new US sanctions against Iran meant that tensions in the Middle East increased markedly with the US also pledging military support to Saudi Arabia to boost their air and missile defences. Iranian-backed Houthi rebels have claimed responsibility for the drone and missile attacks although Iran denies any involvement. We expect tensions to remain elevated.

The Federal Reserve moved in line with consensus last week, cutting interest rates by 25bps; Trump was quick to lambast Chairman Powell for lacking “guts”. While a twitter outburst from Trump is of little surprise, what is a surprising is how the decision to cut interest rates has caused division with the Federal Open Market Committee; seven members voted to cut, two members voted to maintain, and one member voted to cut further. Powell cited that a second cut was necessary due to slowing political growth and worsening trade tensions however, the dissent within the committee will make it more difficult to decipher the trajectory of interest rate policy, resulting in polls for further rate cuts falling from 100% to 80%.

Several weeks ago, we wrote about the suspension of parliament, titled “Prorogue” and in the UK, parliament remains suspended as a result of the invocation of prorogation. In the week ahead, we expect a decision from the Supreme Court over whether Boris Johnson acted unlawfully by suspending parliament; to be clear, this is not about Brexit, it is a legal argument. After all, there is no one place where all the rules of government are written down, which means the Supreme Court must decide between the competing legal arguments, providing a stress-test of another kind, that of our unwritten constitution.

Jon DoyleThe World In A Week 32 – Judgement Day
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The World In A Week 31 – Beneath The Surface

On the surface, last week appeared quite sedate in markets as global equities, measured by MSCI ACWI rose +0.16% in GBP terms. This was led by UK and Japanese Equities, while the US markets sold off slightly.

Beneath the surface however, there have been important movements in other parts of financial markets. Global and Sterling-denominated Fixed Income sold off quite significantly, in what has been described as a “Bund Tantrum”. US and German yield curves steepened over the course of the last week, as the German 25 and 30 year Bund moved out of negative territory. These moves were driven by a combination of decreased anxiety over the ongoing trade war between the US and China, and the statements by Mario Draghi that the European Central Bank is running out of tools to combat economic malaise and fiscal policy needs to do more to stimulate growth.

On the back of this increase in global rates, equity markets witnessed tectonic shifts of their own. Stocks that exhibit high “momentum”, or in other words the tendency for stocks that have recently done well to continue doing well, sold off heavily. Conversely, “value” (or cheap) stocks outperformed their peers.

The weekend brought additional market-moving headlines, in the form of a large-scale attack on Saudi Arabia’s oil production facilities which cut the country’s output in half. This sent the price of oil rocketing by +20%, which was the largest jump since the 1990 invasion of Kuwait.

Jon DoyleThe World In A Week 31 – Beneath The Surface
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The World In A Week 30 – Prorogue

You may think that the title of this week’s ‘World in a Week’ relates to the protagonist of a play, disappointingly this is not the case. Prorogue is the technical terminology for the discontinuation of a parliamentary session without formerly dissolving parliament. This is what Boris did next, when he announced that parliament would be suspended from mid-September to mid-October, in order to push through Brexit. In a move which received approval from the Queen, Remainers will now have significantly less time to prevent a disorderly Brexit. While it has been cited that Boris will have much greater leverage and credibility in the EU renegotiation of a Brexit deal, he is also at risk of facing a vote of no-confidence, which could trigger a possible election. The Pound came under pressure against the US Dollar on Boris’ announcement, be sure to stay tuned for the next act…

Staying in Europe, equity markets rose steadily last week. The reasons for this were two-fold; firstly, the US/China trade discussions showed signs of improvement, which was positive for Germany whose economic data demonstrated that they had managed to stave off a recession, for now at least. Secondly, Italian markets received a significant fillip when populist party 5-Star Movement and the centre-left democratic party agreed to formalise their plans to build a coalition government. The Italian stock exchange, the FTSE MIB, rose nearly 4% on the back of this news. This positive news was marred by the fact that the coalition will face immediate and tough challenges such as the country’s mounting debt, a stagnating economy, and the expectation that they are likely to breach their target budget deficit in 2020. Italy have already come under scrutiny by the EU in May of this year. It is broadly expected that the coalition will go ahead but with political views that are poles apart, it is questionable whether the coalition will be sustainable over the longer-term.

Jon DoyleThe World In A Week 30 – Prorogue
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