MARKETS – GENERAL
Markets continue to feel the heat from the tensions between the US and China. We have had various new retaliations in the ongoing spat and with no obvious resolution in sight, equities have experienced some weak days of late on the back of the deteriorating newsflow. Trump’s ratcheting of tariffs by 5% on a wide range of goods imported from China came shortly after the Chinese had made a similar move and this, coupled with US concerns over the Chinese weakening their currency, has been creating a very fragile environment for investors. Bizarrely, one of the reasons for optimism that there will ultimately be some kind of deal, is that the escalations are such that they are causing real economic damage, and neither China nor the US is in a position to wear this for very long. Realistically, the fortunes of global markets are likely to wax and wane depending on the newsflow in this area, but sell-offs are being contained for now on the basis that the two sides will have to see sense. All of this comes at a time when the global economy is already in a rather precarious state with the bond markets signalling that a recession in the US and elsewhere is not far away, and also that the long-term outlook is challenging. Some of the data coming out of China and Europe has been extremely concerning, and there is only a certain amount of time before investors lose faith in their ‘benefit of the doubt’ approach. How these markets will hold up in a proper downturn is an unknown, but erring on the side of caution has to be the most sensible and responsible way forward.
UK
The problems facing the global economy have almost taken attention away from domestic issues, but perhaps the relative calm is more due to the fact that we are currently in a Parliamentary recess! The fun and games are likely to resume soon, with the UK facing something close to or even an actual constitutional crisis over the next couple of months. The Prime Minister seems to think he is making progress with the EU, but a renegotiation of the Withdrawal Agreement and the backstop still look difficult to achieve. The EU is not likely to be that accommodating if it thinks that Parliament can block a no deal and possibly turn its back on Brexit of any kind after a ‘democratic event’. Those MPs desperate to block a no deal are in full strategy mode but seem to have a problem over who would lead a short-term government following a successful no confidence vote in Boris Johnson, given what a divisive figure Jeremy Corbyn is proving to be. Someone else may perform this role of course, but the more likely option is that Parliament will try to take control of Government business and legislate such that an extension to Article 50 has to be sought. This morning’s news that the Government will seek to suspend Parliament is designed to close down these options and puts pressure back on the EU. The constitutional crisis that we feared looks like it is upon us. In short, we face almost no clarity and enormous political risk. We have taken action over several years in anticipation of domestic problems, but the possibility of further, inflation-inducing currency weakness and rate cuts in the event of a ‘no deal outcome’ have led us to introduce index-linked gilts for some investors. The UK can be made to look tempting on many grounds – not least valuation – but the risks still look significant to us, Prime Ministerial swagger aside!
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