MARKETS – GENERAL
Relations between the US and China do not look to be improving and financial markets are now starting to adjust to the fact we may not get a resolution on the trade front. It has even been speculated that China may start to sell down US Treasuries and although this may be fanciful, a boycott on rare earth exports to the US might not be. This comes at a time when economic data from around the globe is less than convincing and the bond markets have started to react. After the rapid recovery in financial assets this year, safe havens are now in demand with the yields on US and German government bonds continuing to tumble. All is not well, and the prospect of recession is starting to worry investors with the spread between the three month and 10-year US government bond yields turning negative in what is a pretty reliable indicator of tough times ahead. Bond investors are now expecting the Federal Reserve to cut interest rates by 0.5% over the next year. This is despite the US central bank saying they are pausing on any interest rate movements for now, suggesting that investors are more worried about the outlook than the Fed. Not all bond yields are being pushed lower by the climate of fear though – Italy looks as though she is heading for a collision with the EU over plans to reduce taxes and discard EU budget rules and the resulting debt implications have seen a sell-off in Italian bonds. Germany is slowing down with unemployment starting to nudge up and manufacturing struggling. Signs of weakness abound at the moment and although we are holding firm in our (already cautious) positioning we are naturally having conversations about whether further risk reduction is necessary. The second half of 2019 and the year that follows could see things get much more difficult.
UK
Mrs May has gone. Or rather she is going. But what comes next? The Conservative leadership election should be settled by the end of July and the list of contenders is already long. It would appear that the catastrophic showing for the party in the European elections means that the next Conservative leader is likely to be one who can attract voters back from the Brexit party. This naturally makes Boris Johnson the favourite but there are many reasons why this may not happen, or even make it unlikely. He (along with some other candidates) have made the possibility of a no deal Brexit more real than it was before; it would seem as if any government prepared to proceed in this way could be brought down in a vote of no confidence. This of course makes the possibility of a General Election in the Autumn a distinct possibility and a new leader, whether staunchly pro-leave or more moderate, may go to the country at some point anyway. Meanwhile, it looks as if Labour will move towards making a second referendum official policy after their poor showing and this causes another unknown for investors to consider. We seem to have two different but unattractive (investment-wise) outcomes for the UK – a pro-market Conservative party but with a potentially “bad Brexit” on the one hand and “no Brexit” under a Labour government with other policies the market may view as hostile. In truth there are other possible outcomes but the only really positive (market) one would be some sort of soft Brexit under a moderate Conservative administration. This could transpire, but the EU seems unwilling to renegotiate for now – how ironic it would be if something close to Mrs May’s deal ultimately got passed. The UK remains one for the brave.
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