Friday, 27th of September 2019
“Lawyers are the only persons in whom ignorance of the law is not punished.”
– Jeremy Bentham
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Markets were decidedly choppy this week as the Democrats finally moved to impeach Donald Trump. Previously, the party was split over whether and when to launch impeachment proceedings against the President, but events of the past week have brought progressives and moderates together and forced the hand of House Speaker Nancy Pelosi. Until now, Pelosi had been loath to join the chorus of voices calling for Trump’s impeachment, given that most polls suggest that the move would be unpopular with independent voters and unlikely to result in the President’s removal from office anyway, what with the Republican Senate majority. However, she was left with few alternatives this week after news broke that earlier in the summer a CIA officer had blown the whistle on an attempt by the Donald to pressure Ukrainian President, Vlodymyr Zelensky, into investigating Joe Biden, as well as Biden’s son, Hunter, who is on the board of a large Ukrainian gas company. In what his political opponents are characterising as a Mafia-style quid pro quo, the US President ordered that military aid be withheld from the country in advance of the call where the two leaders discussed the Bidens. If true, most experts agree that it would be a flagrant abuse of power. However, with so much left unsaid and no statement linking the two matters directly, Trump’s allies continue to circle the wagons. They protest that the President only withheld aid in an effort to force European countries to stump up more for Ukraine’s defence and not for nefarious purposes. Having initially sought to block the release of any call records (burying the transcript in a classified system, where the whistle-blower contends other awkward items have been concealed), the White House has since produced the notes made by officials who joined the call. They clearly show that Trump requested that Ukraine investigate Joe and Hunter Biden, but nothing was explicitly offered in return (whatever Trump had in mind). If the transcript confirms what the notes suggest, then the President will probably stay in office to fight the 2020 election. In the meantime, the whole impeachment process is likely to hobble Congress and prevent any new policy initiatives. If you were hoping for a pre-election fiscal stimulus, forget it. Equities sold-off during Clinton’s impeachment battle and we can expect some pressure again today. As ever, central banks stand ready to pick up the pieces, but we are pleased to have protection in portfolios nonetheless. We also believe that – with all that is happening – gold looks attractive. Looser monetary policy plus political volatility equals higher gold prices and, although we are more optimistic on growth than most, gold helps to hedge that view.
On the topic of monetary policy, there has been an almighty bust-up at the ECB. It turns out that ECB President Mario Draghi’s decision a fortnight ago to cut interest rates to -50bps and restart QE had far from unanimous support on the bank’s governing council. It was also opposed by the central banks of several member states. Representatives from the so-called ‘northern economies’, including Germany, Denmark and the Netherlands, have since been strident in their criticism of Draghi. And on Thursday, Germany’s ECB executive board member, Sabine Lautenschläger, resigned in protest at the bank’s ultra-dovish stance. Politicians and economist in the northern economies have long complained that the ECB’s loose monetary policy is creating bubbles in credit and other markets, hammering the savings of prudent citizens, and failing (for the most part) to reignite growth. For his part, Draghi has often attacked these countries’ fiscal surpluses, given what he (and many others) perceive as the need to stimulate demand in the single currency zone. Both sides have a point. However, it is not clear that either can get their way. The contradiction is inherent to European integration where divergent cultures and economies are forced into a single policy straitjacket. Put simply, Europe’s diversity is a roadblock to a functioning Eurozone. In German, the word for debt is Schuld, which is the same as the word for guilt. Needless to say, the same is not true of Greek, French or Italian. Looking to the future, the dispute is sure to rumble on. However, with data turning down the hawks will probably lose out in the short-term at least. The flash Eurozone PMI for manufacturing stands at a dismal 45.6 for September, while the PMI for the economy as a whole is just 50.4 (barely above 50, which represents zero growth). In Germany, the auto industry has seen a 12% fall in production and a 14% decline in exports this year pushing the flash PMI for manufacturing down to just 41.4 in September, the lowest level since 2009. The outlook for export-focused industries in Europe’s largest economy and beyond does not look good, given the headwinds facing their biggest Asian customers. What was that about not needing any stimulus? Unsurprisingly given the bad economic news, this week the Euro reached its lowest level against the USD in more than 2 years at 1.0900. This vindicates our long held view that the USD would remain strong due to the growth and interest rate differential between the US and Europe.
In other political news this week, the UK Supreme Court offered a stinging rebuke to PM Boris Johnson, describing his decision to prorogue (i.e., suspend) Parliament for five weeks in advance of holding a Queen’s Speech on October 14 as unlawful. Prorogation is normally uncontroversial, but the belief that it was being used to prevent Parliament legislating to prevent a ‘no deal’ Brexit and scrutinise the Government’s handling of EU negotiations sparked litigation in England and Scotland. After the English High Court backed the Government and the Scottish Court of Session backed the litigants, the cases culminated in a unanimous Supreme Court verdict in favour of the latter. The decision broke new legal ground and was a shock to many, including the UK Attorney General, because it was the first time in history that a court had sought to referee the relationship between the Government and Parliament. In the process, the judgement transformed what many considered to be a political issue (i.e., prorogation) into a legally justiciable matter for which the courts can determine what is or is not ‘a good enough reason’. In the country’s uncodified constitution, the courts have traditionally avoided the arena of ‘high politics’ and the process of ‘judicial review’ under which this decision was taken is controversial at the best of times. The judgement has therefore caused consternation among many Brexit-backing MPs and voters even as the PM’s opponents have called for his resignation in response. There’s no chance that Johnson will resign, however. He is demanding an election instead through which he hopes to secure a majority and bring the Brexit saga to a close. Indeed, he has been in campaign mode from day 1, and the decision of the Supreme Court plays into the narrative he has been constructing since July – of the People against Parliament and the pro-EU establishment. Opposition parties have so far refused to give BoJo an election, despite being unable to agree on any alternative to the current Brexit deal, just in case he somehow engineers a ‘no deal’ Brexit during the campaign. They also cannot agree who would take over in a caretaker capacity with the sole purpose of requesting a Brexit extension if a confidence vote in the government were to succeed. His lame duck minority government therefore looks set to continue. Looking ahead, the so-called Benn Act is meant to prevent a ‘no deal’ Brexit from happening on 31 October, but there may be loopholes that the Government can exploit – with or without an election. One that has been floated is the possibility of suspending the bill until after October 31 on an Order of the Privy Council (composed of ministers). However, this is considered a last resort and would likely trigger a confidence vote anyway. Sooner or later an election is inevitable and with it, maybe, an answer. In the meantime, the political temperature continues to rise, and we continue to steer clear of sterling. Incidentally, the pound was down this week despite Parliament’s return.
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