The UK extended its membership of the European Union for the third time as Parliament deliberated over the deal negotiated by Boris Johnson. The electorate will now go to the polls on 12th December to decide who will negotiate our future relationship with the European Union. The question remains whether this election will solve the divide in Parliament and the issue of Brexit which is dominating the domestic agenda.
More pertinently, trade discussions between US and China are becoming more cordial and this should have a positive impact on markets as the world’s two largest economies aim for a mutually attractive agreement.
In an attempt to break the Parliament deadlock, a general election has been called for 12th December. Boris Johnson is aiming to win a majority to allow him to implement the deal the Government negotiated last month. The leader of the opposition, Jeremy Corbyn, has set out his election pitch by setting out a radical agenda of renationalisation and targeting the “privileged few” to rally support against the Conservatives.
The question still remains whether an election can break the Parliament impasse. 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%. In addition, the Brexit party could play a crucial role in this election. There have been some suggestions that Nigel Farage, a key figure in the Brexit debate, could stand down hundreds of seats in what could prove a game-changer to prime minister Boris Johnson’s hopes of winning a parliamentary majority. 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.
Regardless of domestic policy, this general election is likely to be a quasi-referendum on the UK’s future relationship with the European Union. This makes the result highly unpredictable and much will depend on the strength of the political campaign. In addition, TV debates have been proposed and these will also have a material effect on the outcome of the election.
Much of global market sentiment in 2019 has been whimsically determined by whether the US and China can find a mutual agreement in a trade war which began in July 2018. Many have argued that the trade war is a political game which will allow Donald Trump to eventually claim a “moral and economic” victory against China and therefore publicise this to the US electorate to bolster his support for the November 2020 election. At present, the aggressive rhetoric we have seen from both parties has been toned down and they are “close to finalising some sections” of an interim agreement to ease trade tensions between the two countries. Speculations of a deal were supposed to be approved at a trade summit in Chile this month but this has now been cancelled due to the civil unrest being experienced across the country. There is still hope that a preliminary deal can be agreed before the end of the year and this will give some respite to markets.
The Federal Reserve chose to cut rates again last month, as the central bank continued to defy their original projection of almost one year ago. The cut, the third this year, was in line with the expectations of investors and economists but the central bank’s projections indicated that they would now wait for further economic data before deciding to make any future decisions on monetary policy. The latest interest rate cut was a response to three developments. Manufacturing has slowed all over the world, trade uncertainty is having an effect on US activity and the Federal Reserve’s preferred measure of inflation continues to run below its target of 2%. However, Jay Powell, the Federal Reserve Chairman, also stated that the risk of a no deal Brexit had reduced, and the likelihood of a US-China trade deal had increased. Both of these factors had improved the central bank’s outlook for the US economy. Although the US economy eased slightly in the third quarter, it still beat expectations and therefore each of these variables will have an impact on future central bank monetary policy.
Christine Lagarde, former head of the International Monetary Fund, will replace Mario Draghi as President of the European Central Bank (ECB) and Ursula von der Leyen will succeed the European Commission President Jean-Claude Juncker. The more pertinent appointment is Lagarde who will lead the central bank for an eight-year term. She enters this position in a time where most economists believe that the ECB’s toolkit for stimulus is almost empty. Interest rates are at a record low and are already in negative territory and the central bank has announced further stimulus in the form of €20bn quantitative easing. It will certainly be an interesting tenure with plenty of twists and turns to be expected.
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. 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.
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 seeing the economy continue to defy expectations. 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 November 2019, and are subject to change. The update is for information purposes only. Source: Financial Times.