MARKETS – GENERAL
Any suggestions that there will be a swift resolution to the US-China trade conflict look fanciful, though every morsel of improved newsflow does buoy markets. Democrats are looking increasingly keen to try to impeach President Trump and this has further unsettled some investors. Aside from these ongoing concerns, the economic data remains largely uninspiring. China continues to slow and most of the indicators coming from other major economies are showing varying levels of distress. Eurozone data is predictably poor and recent Japanese manufacturing numbers were also disappointing. China may move to stimulate the economy further, but the apparent reluctance to do anything radical may be a reflection of the accumulated credit problems in the country. Of course, a trade deal, whether far reaching or piecemeal, would materially improve risk sentiment, but it is unlikely to mask the fundamental problems facing the world economy at this delicate point in the cycle. Globalisation seems to have moved out of its expansionary phase with geopolitics and electorates indicating that a different future may be likely or desired. Some hope that coordinated fiscal stimulus will help us escape some of the structural problems facing the economy, but the scope for this would seem to be limited given current debt burdens. This leaves us with the question of just what wonderful tools the central bankers have in their toolkit to take monetary policy experimentation to the next level. All we can say for certain is that against this backdrop the case for protective assets in portfolios is stronger than ever.
UK
The decision of the Supreme Court is causing fallout in Westminster with the House of Commons being reconvened after the prorogation was ruled void. This consequence is one of few obvious ones – what else follows is very much up in the air. Boris Johnson is now desperate for an election in which he would push his ‘People v the Establishment’ narrative (the Establishment now including the courts as well as Parliament), but until the extension is guaranteed, the opposition parties will not support it. We were told progress with a deal was being made, but the EU has dampened expectations in this regard again and the event permutations remain many and varied. Aside from the Conservatives’ troubles, Labour are also in disarray, and the Liberal Democrats are seen as having taken a gamble in their Remain commitment, so the political landscape is profoundly uncertain. If we do get a General Election, some still fancy the Conservatives to pull off a decent majority, which would put the EU on the backfoot and potentially create an attractive scenario for UK equities. Then again, it might bring the prospect of no deal back to the table. The global equity markets are unlikely to offer much help to beleaguered UK equities in the event of an extended, difficult period for risk assets, but there is certainly a relative value argument in their favour. It doesn’t feel as if we’re at the maximum point of despair yet though, especially given the recent rally in sterling and the legislation ruling out no deal, so we are minded to wait for a better opportunity.
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