With the Brexit deadline of 31st October swiftly approaching, we have seen another month of unprecedented movements from within the political and legal environment. The Supreme Court ruled that the Prime Minister’s prorogation of Parliament was unlawful as it frustrated the ability to scrutinise the Government over Brexit proceedings and other matters. Boris Johnson is still adamant that the UK will be leaving the European Union with or without a deal by the end of the month. His main obstacle is how he plans to implement this pledge when Parliament has legislated against a no deal. It is likely to be another month of twists and turns and we will be monitoring the situation closely.
Donald Trump is also causing a stir with the latest claims that he attempted to influence the Ukrainian government by promising military aid if their president, Volodymyr Zelensky, used his sources to investigate former vice-president Joe Biden’s son. This has raised impeachment concerns within the White House.
September saw Parliament close and re-open, the pound fluctuate drastically and the party political conference season begin. Brexit has played a part in all of this and we are now at a pivotal point in terms of negotiations between the European Union (EU) and the UK Government. The sticking point has been the infamous Irish backstop. EU officials previously stated that they would not move on this part of the withdrawal agreement, but Jean Claude Juncker has now stated that the controversial backstop could be dropped and replaced with alternatives. The problem is that, so far, the Government has not fashioned any viable alternatives and therefore we are currently in the same stalemate we have been trapped in for the last three years. Even if the UK was to achieve a deal, this would have to be agreed in Parliament and, with no working majority, there is no guarantee that a deal would be ratified. For this reason, Boris Johnson has vigorously called for an election, but the opposition parties will not agree to this until the UK has avoided a no deal and extended its membership with the EU.
The question is whether an election can solve the divide in Parliament. The polls suggest that Boris Johnson has a healthy double digit lead ahead of Jeremy Corbyn, albeit this same trend was true when Theresa May called her election back in 2017 and the Conservatives ended up with a lead of 2.5%. Also, the Brexit Party is likely to take a share of the vote in the next election, which could potentially split Conservative support. Adding further to this uncertainty is the Liberal Democrats, who have taken a clear view that they would like the UK to remain within the European Union, by stating they would revoke Article 50 if they received a majority. Again, they are likely to attract some of the vote share from the Labour party who have not given a concrete view on their position on Brexit.
A general election is likely to be a quasi-referendum, making the result highly unpredictable. Some political commentators have suggested that some form of a coalition is likely, though whether this coalition will be strong enough to determine a clear mandate for the UK to remain or leave the European Union is uncertain.
The Federal Reserve chose to cut rates again last month, as the central bank continued to defy their original projection raised almost one year ago. The cut, the second this year, was in line with the expectations of investors and economists but the central bank’s projections indicated a more hawkish line than markets had anticipated. Jay Powell, the Federal Reserve Chairman, signalled that it could halt rate cuts for the rest of 2019 and 2020 despite uncertainty over trade and fierce pressure from the White House. The US President reacted in his usual manner, lambasting the central bank and stating that there should be even looser monetary policy. Analysts have suggested that the President is ramping up his aggressive tone in the US-China trade war to force the central bank to have a more accommodative interest rate policy. We still believe that Trump’s re-election will be mainly determined on the strength of the economy and therefore, the Federal Reserve could be forced to inject economic stimulus by lowering interest rates due to his uncompromising approach to the trade war, or he may soften his aggressive stance which could alleviate global concerns around trade. Both outcomes will be favourable for markets and likely provide the positive perception the US President desires.
The growing concern for the President is the increasing pressure from the Democrats in the form of impeachment. A whistleblower in the White House has stated the US President attempted to encourage the Ukrainian government (by promising military aid) to investigate the Biden family’s activities in Ukraine. In other words, the President allegedly used US Taxpayer’s money for political gain. This has caused an uproar with the Democrats who have launched proceedings to remove Donald Trump from office. The Democrat’s conundrum is that they will require two thirds of the Senate to vote for the US President to be impeached, an unlikely outcome due to the Republican majority. The Democrats are attempting to create a perception of distrust in the Republican party and whether this plan is successful will be made clear as we get closer to the US election next November.
The European Central Bank (ECB) announced its biggest package of rate cuts and economic stimulus in three years as President Mario Draghi warned governments that they needed to act quickly to revive flagging eurozone growth. The ECB cut interest rates further into negative territory and revived its contentious bond buying strategy for an unlimited period. It also offered eurozone banks tiered interest rates in a bid to ease the pressure on their lending margins. Draghi said higher government spending was “more urgent than before” to counter the global slowdown and that a long-term commitment to fiscal union was essential for the eurozone to compete with other global powers.
China’s slowest GDP growth in nearly three decades highlights how the trade war has dampened the economy. Weaker economic growth has prompted the Chinese government to initiate a series of stimulus measures, as well as discussions around potential tax cuts. The breakdown in the US-China trade talks has reawakened the concerns we experienced in the final quarter of 2018 and this will continue until a deal is struck. We still believe that the most viable solution for growth in this area is for China to make an agreement with the US to remove the restrictive trade barriers and reopen opportunities for growth.
Macro events such as the breakdown in US-China trade negotiations, Brexit and the slowdown in Chinese growth are all influencing the direction of markets. The US-China talks continue to be protracted but we are hopeful that both world leaders will come to an amicable agreement to provide more certainty within the world economy. Despite the Federal Reserve dampening their outlook on domestic growth, the US is powering ahead when compared with other developed economies and we are still seeing business confidence improve which is supporting investment. The UK market will remain uncertain until the Brexit ambiguity has been resolved. The outlook for Europe is negative at present with Brexit uncertainty and US-China trade tensions being clear factors affecting this, which we believe will continue in the short term. We continue to favour fund managers that have a flexible, active approach, with a global remit, so they can asset allocate across the entire investment world (as we believe diversification is key). However, most importantly we will endeavour, on your behalf, to identify fund managers that invest in underleveraged companies with strong balance sheets as we believe that highly indebted companies will be punished, if there are any unexpected events.
Please note: The opinions expressed in this update are those of A&J Wealth Management Limited only, as at 1st October 2019, and are subject to change. The update is for information purposes only. Source: Financial Times.