Market Commentary October

UK

Posturing over Brexit ratcheted up on both sides last month, as Boris Johnson tried to position his government for final rounds of trade talks set to decide the fate of a deal. The UK government has been actively drawing up legislation that would undermine key sections of the withdrawal agreement, namely parts regarding trade borders within the UK between Great Britain and Northern Ireland. These plans made it past the first hurdle in Parliament in September, setting up a potentially nasty rebellion for Boris Johnson’s government from his own Conservative MPs who oppose the moves.

More positively, the UK signed what has been labelled an “Historic trade agreement” with Japan. This is a major win for the government as it touts the advantages of leaving the European Union. However, upon first glance it appears this deal may tie the UK into stricter state aid rules than what is currently being discussed with the EU, making for a rather confused negotiating message.

AstraZeneca has recently paused trials of its COVID vaccine after one participant fell ill. The company have said this is completely standard procedure and that they will restart trials as soon as possible. These kinks in the process are not unusual and are to be expected, however much of the rally in financial markets has been off the back of an assumed near certainty that a vaccine is on the horizon.

The UK economy grew by 6.6% in July, data shows, though this remains 11.7% below pre-pandemic levels, showing the scale of recovery needed for the UK economy. Worries persist over the potential impact on employment as the furlough scheme is phased out, however Chancellor Rishi Sunak has announced a new scheme in its place, mirroring the Germany model, which will pay staff for the hours they are not working, allowing employees to work part time whilst receiving subsidised wages.

Eurozone/EU

The pace of Germany’s economic recovery came into focus as the pickup in the manufacturing sector slowed in July, with industrial output rising 1.2% from the previous month and well below consensus estimates of 4.5%. The German government have said though that the country’s industry is back at nearly 90% of pre-crisis levels, so further recovery from here will likely continue to be more moderate.

The EU is facing steep increases in the number of coronavirus cases heading into winter. In a very stark warning, Angela Merkel has said that Germany faces more than 19,000 new cases daily by Christmas if the current trend is not halted. France meanwhile has been recording around 12,000 cases daily, and we are seeing strong increases in much of the continent now.

The ECB has launched an in-depth review of its €1.35tn bond buying programme. Questions being asked include how long the Pandemic Emergency Purchase Programme should continue and whether some of the flexibility afforded in this programme should be transferred to the ECB’s longer running asset-purchase schemes. These questions will likely prove to be controversial, particularly in Germany where a legal battle was started over the bond-buying scheme.

US

Fresh from his nomination for the Nobel Peace Prize by a right-wing Norwegian lawmaker, President Trump told a journalist during interviews for an upcoming book, that he had deliberately downplayed the severity of the coronavirus, saying that he did not want to cause panic. The Democrats have leapt on this as proof the president is not fit for office and has failed to do his job, in what is clearly a serious blow for the president ahead of the November election. It seems the best strategy for Democratic presidential nominee Joe Biden is to simply remain quiet and let Trump continue to pressure himself.

Trump has, meanwhile, refused to commit to a peaceful transfer of power if he were to lose the upcoming November election. The President has repeatedly complained of electoral fraud via mail-in voting, which is predicted to work in his opponent’s favour, and has previously even refused to commit to accepting the election results back in 2016. The mere suggestion that a president might not respect the result of a democratic and constitutional guarantee is quite unthinkable, yet a possible reality at this point. The recent debate between the two hardly did a lot to assure anybody, as both candidates engaged in a match of insults and shouting.

Asia

In what seemed to be the catalyst that sent tech stocks heading lower finally, it became apparent that Japanese tech conglomerate Softbank had been buying $billions worth of call options on the largest US tech companies, giving some more information on one of the reasons why these big tech companies have defied critics and continued to rise to all-time high valuations over the last few months.

Japanese Prime Minister Shinzo Abe stepped down amid health concerns and replaced by Yoshihide Suga after. Suga has been a long-time cabinet member under Abe and is widely expected to continue his predecessor’s popular economic policies, which will steady any concerns markets may have had over future policy uncertainty. He takes the helm at a difficult time for Japan, which has struggled with coronavirus like many other nations, and which is dealing with a rapidly ageing population.

Vietnam have recently declared their approval for entry into the Trans-Pacific Partnership (TPP), which the UK government has been touting since the Brexit referendum vote in 2016. The US pulled out of this deal soon after Trump took office. The benefits to either side will likely be weak initially.

In China, little has been said of the recent US decision to force a sale of the popular social media app TikTok. President Trump declared a deadline for the sale of the international arm of the Chinese company, citing data protection fears. China has a long history of blocking access to foreign companies, including Facebook, Google and Amazon. So far China seems to be sticking to the phase one trade agreement struck between the two sides in 2019, though any progress beyond this seems increasingly unlikely.



Please note: The opinions expressed in this update are those of A&J Wealth Management Limited only, as at the 1st October 2020 and are subject to change. The update is for information purposes only.



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