Friday, 6th of September 2019
“The United States brags about its political system, but the President says one thing during the election, something else when he takes office, something else at midterm and something else when he leaves.”
– Deng Xiaoping
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It was a positive week in markets, which were buoyed by the confirmation that trade talks would resume in October. The S&P sits +1.7% higher as of Thursday’s close. Data was mixed and started on a negative tone with the US manufacturing PMI initial reading of <50 (indicating contraction) suggesting that the US economy is no longer immune from the global slowdown, and German factory orders continued to slide. However, the US services PMI rebounded strongly, while European and Chinese services PMIs showed some resilience too. For now, service growth is offsetting the manufacturing recession.
The slightly less gloomy news spelled trouble for long rates positions as core sovereign bonds suffered. On Thursday, 30y bunds had their sharpest sell-off in 4 years. This showcases the danger of holding these long duration yet negative yielding instruments and considering them “safe”. The yield jump represented a -4.4% single day loss, and a -6.6% loss over the week and the bonds still offer a negative yield! Even if an investor topped up now, they would have no prospect of recouping their losses through carry. We’ll pass, thanks.
Geopolitical news was also mixed. Firstly, on the positive side, Italy has a government again following two weeks without one. The previous administration tumbled after Matteo Salvini pulled his alt-right Northern League out of a coalition with M5S. It had always been a shaky union as, beyond a populist tinge, the two shared little in common as far as policy was concerned. His plan was to force a new election and claim victory but M5S has succeeded in pulling together a coalition with PD, a pro-business, pro-EU party. However, the contrasting stances with this pair are also stark and in a country that has had 67 governments since the end of WWII (1 every 13.25 months), we won’t be holding our breath for the anniversary party. Meanwhile in Germany, there was relief following two large state elections because the SPD and the CDU both secured narrow wins over the AfD, Germany’s alt-right upstart. A coalition will continue to keep it out of power. Nevertheless, the significant gains made by the AfD shows that there is significant frustration with the German establishment.
Then in Hong-Kong, Carrie Lam finally withdrew the extradition bill from the parliamentary agenda after 13 weeks of protests. Although she had previously said it was “dead”, it had not been formally withdrawn. The Hang-Seng index hosted a sharp rally in response, up 4% on the day. Nonetheless, protestors have returned to the streets because the withdrawal was just one of their 5 demands, the others being the resignation of Carrie Lam, an inquiry into police brutality, for those arrested to be released, and greater democratic freedoms. The final one will certainly be a sticking point.
Brexit shenanigans continue. This week, MPs called an emergency debate to pass a bill to stop a no-deal Brexit, which passed when a band of Tory rebels voted against the government and were summarily expelled from the party. This, as well as defections, have left Johnson at the head of a minority government to the tune of 37 seats. He used this as pretext for a vote on a snap election, in which he would seek a mandate for a renegotiated deal or a hard Brexit. Nevertheless, he failed to reach the two thirds required. The most likely outcome now is a further extension of the Brexit process to January 2020, with the potential for an election in the interim. The pound has jumped by 1% over the week, but we are now approaching 6 months since the UK was supposed to leave the EU, and the story is clearly far from over.
Finally, our thoughts are with the people of the Bahamas, whose islands were battered by the highest winds ever to make landfall (185mph, gusts of 220mph), and a storm surge of 6m. Settlements on Abaco have been totally destroyed.
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