Friday, 13th of September 2019
“Of all men’s miseries the bitterest is this: to know so much and to have control over nothing.”
– Herodotus
________________________________________
Markets performed strongly this week as investors geared up for a US rate cut next week and as a string of positive statements by US and European officials turbocharged the recovery we have seen since the end of August. Firstly, on Wednesday evening, President Trump announced that he would delay increasing tariffs on $250bn of Chinese goods for 15 days (from October 1st to October 15th) as a gesture of political goodwill. Affected imports already face a 25% tariff, and this will rise to 30% if the hike goes ahead next month. The additional 5% levy was drawn up in retaliation to new Chinese duties on $75bn of US imports. These measures were implemented on September 1st when major US tariffs targeting $300bn of Chinese goods came into force. The tit-for-tat nature of these (and other) actions has spooked the market, which fears an uncontrollable spiral of trade measures could prompt a global recession and further geopolitical polarisation. But Trump’s decision to delay the latest tariff volley has been interpreted as an attempt to avoid just such a spiral developing. Ostensibly, it was made at the request of Chinese Vice Premier, Liu He, to prevent an awkward showdown during the 70th Anniversary celebrations of the People’s Republic of China. Certainly, new trade measures during this sensitive period would be highly provocative. However, the delay is also clearly intended to give both sides some breathing space ahead of talks planned for early October. Importantly, it signals that the US is serious about getting a deal (although perhaps just an ‘interim deal’, as mooted by the President himself) to sell to voters alongside the associated benefit of greater economic security ahead of the 2020 election. The Trump campaign is concerned that the President polls poorly against most Democratic challengers and presenting him as a successful dealmaker is arguably one way to reverse those numbers. Still, the US President will undoubtedly want to keep his options open. If China do choose to play hardball (and wait him out), then Trump may provoke a showdown with the Middle Kingdom and run as the only leader tough enough to handle the emerging new Cold War. With the resignation of his hawkish US National Security Advisor, John Bolton, the President is more likely to seek a deal to resolve the Trade War than escalate the dispute. But the more confrontational approach cannot be ruled out and would pave the way for a significant sell-off without unprecedented monetary support.
The second major announcement to boost stocks this week was made by the outgoing President of the ECB, Mario Draghi, who pulled out all the stops to boost the flagging Eurozone economy on Thursday. Most crucially, the ECB has cut rates further into the negative and decided to relaunch its EUR 2.6bn QE programme which has been on hold since the end of last year. The central bank is due to purchase EUR 20bn of financial assets (primarily lower-yielding bonds) every month from November with no planned exit date having been set. The impact of this decision is hard to overstate, given that its express purpose is to lower the cost of capital for businesses by forcing down longer-dated bond yields and encouraging investors to rebalance their portfolios into riskier assets. Thus, equity investors should rejoice despite the deteriorating outlook that led Draghi to adopt the policy. The US-China trade war, global economic slowdown and recession in manufacturing have taken their toll on highly-globalised core European economies, such as Germany (which also runs a large demand-reducing fiscal surplus). At the same time, the prospect of a ‘no deal’ Brexit hangs over the continent at a moment of relative weakness and estrangement from its traditional ally, America. Nevertheless, the fundamentals will take a backseat if the ‘Draghi put’ is alive and well… And there is every sign that it will outlast the man himself when his dovish successor, Christine Lagarde, takes over at the ECB in a few weeks’ time.
The final topic for discussion today is the small matter of Brexit. Since returning from its summer recess at the start of last week, the UK Parliament has been in revolt against the new PM, Boris Johnson, and his ‘do or die’ pledge to leave the EU on October 31st, deal or no deal. Although there is a Parliamentary majority for Brexit, there is no majority for the Brexit deal struck by Theresa May or for a ‘no deal’ Brexit (i.e., the two options currently on offer). The legal default is for the UK to leave the EU without a deal on Halloween unless the UK and EU have struck an agreement by then. Bojo’s pledge never to seek an extension has made this deadline harder than the 31st March ever looked. And the UK government has now spent many billions of pounds preparing for the disruption that ‘no deal’ would be likely to bring. However, late last week Parliament (with the constitutionally dubious help of Speaker John Bercow) succeeded in passing legislation demanding that he request and agree to a 3-month extension of the Article 50 process by 19th October, unless an EU-UK deal or a ‘no deal’ Brexit has been approved by Parliament. The PM has flat-out refused to comply and members of the government are looking to exploit any perceived loopholes in the bill to avoid making the request altogether or make the request in a manner in which it will not be granted. Alternatively, the PM may ask a sympathetic country to veto the extension request or sabotage any extension that is granted. Several options present themselves, all of which would cause uproar in Parliament – but perhaps rather less among voters who are sick of talking about Brexit. Indeed, polls suggest that Boris Johnson’s Tories would be likely to romp home to victory should an election be held, particularly after a ‘no deal’ Brexit which would kill off the challenge from the Brexit Party. Of course, there is also no guarantee that the EU would grant a UK extension request without good reason (e.g., to make time for an election or referendum). Looking ahead, the UK Parliament is currently (and controversially) prorogued until mid-October, so you should expect a lot of noise from MPs but not much action for a month at least. What to watch to read the future in the meantime will be the negotiations between the UK and EU over ‘alternative arrangements’ to the so-called Irish backstop. These may include an all-Ireland ‘phytosanitary zone’ to eliminate the need for border checks on agricultural goods (which represent a major and highly regulated component of cross-border trade). A deal is arguably possible with a sectoral backstop like this but ‘no deal’ in October (or January) remains a distinct probability.
In March's news roundup, we look at some of the big deals and trends in the London office market, which has seen a very active month driven by the return of private equity (PE) buyers seeking to take advantage of discounted pricing. We highlight some of the biggest deals and what these mean for the capital.
As families expand, diverse perspectives, voices, and expectations emerge. Each generation brings unique dynamics and values, shaping the family business's future. We offer three key considerations for grooming future leaders within the family business context.
In this market update, we discuss the strength of the equity rally this year, the end of ultra-easy monetary exceptionalism in Japan, and the investment case for gold.