Friday, 30th of August 2019
“The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own.”
– Warren Buffet
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Markets continued to dance to the Trade War’s tune over the course of the week. Having dived last Friday as the US and China raised additional levies on imports, investors waited for a read on the G7 summit’s backroom negotiations. Trump certainly kept us guessing, describing the Chinese leader as both the “enemy” and an “outstanding leader”. We have come to learn that self-contradiction is a wholeheartedly Trumpian tactic. The man himself professed that it’s “the way I negotiate”. We can therefore expect more changes in direction from the US President, and we remain happy with our equity put protection, even if markets were encouraged by his closing tone at the summit, stating that the Chinese “very badly” wanted a deal. Stocks moved sharply higher in response, with the S&P on track for its first positive week in August, lifting bourses more broadly.
To see the effect that this ongoing trade slowdown is having on the real economy, we need look no further than Germany which is the most export-oriented country in the G7. The latest IFO business confidence survey printed its lowest level since 2009. The associated commentary was unambiguously gloomy as well, stating that “not a single ray of light was to be seen in any of Germany’s key industries”. Europe’s growth engine is sputtering.
And of course, the Brexit process produced its weekly pandemonium as Boris Johnson employed a wily strategy to leave the no-deal option available. These tactics relate to the quirks of the Parliamentary process. With MPs currently on recess, and party conferences taking them away from the House through the latter stages of September, Boris Johnson’s prorogue (formally ending the Parliamentary session) further restricts the time during which Brexit can be debated. A tactical prorogue is perfectly legal but controversial. GBP fell in response to the news, testing the 1.20 handle, while Remainers are hatching their own schemes, including forcing Parliament to sit through its recess and even calling a no confidence vote in the Government (the “nuclear option”). The situation is fluid, and will no doubt evolve as the Brexit deadline approaches.
In the world of central banking, all eyes were fixed on the picturesque resort of Jackson Hole, Wyoming. Originally picked for its excellent trout fishing (which served as bait to attract Paul Volcker), it has become the go-to gathering for rate-setters. It took Trump just 57 minutes from the moment Jerome Powell started speaking to tweet his thoughts on the Chairman of the world’s most powerful central bank, declaring that he (like China) is the “enemy”. Proceedings at the event itself were far more cordial; the common themes were an acceptance of a lower-for-longer environment and disgruntlement with the ongoing trade spats. More recently, Lagarde made her first public comments on monetary policy since the official announcement that she’ll take the helm come November. They pointed strongly towards a continuation of the ultra-loose financing conditions that Draghi will leave her with.
There is, then, no clear end in sight for the bizarre conditions that fixed income markets find themselves in. Negative rates on European core fixed income paint a bleak picture for the economy, as do plunging yields on Treasuries (US Agg is heading for its best month since 2008), yet spreads remain tight on riskier bonds. And if we needed a reminder that they are risky, Argentina served that purpose nicely when it asked investors to “voluntarily” extend its debt maturities, which will count as another default (just two years after the country issued a century bond!). Meanwhile in the corporate world, several junk bonds offer negative rates in Europe. In these through-the-looking-glass times, we think the willingness to steer clear of crowd and remain focussed on fundamentals will bear fruit.
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