The Weekly - Skipping and repeating

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23/07/2019
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It has been an enjoyable summer break so far. No, we are not talking about the weather or two weeks holiday in the Mediterranean, but a good break from the all-consuming Brexit negotiations. Since Theresa May handed in her resignation for her failure to bring about a swift exit from the EU, the focus has shifted away from Brexit, at least for a couple of months anyway.

Now the Tory leadership has concluded, I am sure the Brexit impasse will again resume in earnest. There are those market commentators who like to say that our political system is broken, however, a better metaphor for the current situation would be a broken record. It has been skipping and repeating since June 2016 when we voted to leave the EU and we see no sign of this changing anytime soon!
 
Theresa May’s hands were tied, and there is very little to suggest that Boris Johnson will fair any better. He is probably better suited for the top-job as he did campaign for Brexit throughout the referendum. However, it is not lost on anyone that the decision for Boris to campaign for Brexit was probably because it best suited Boris and his ambitions for becoming PM. If he believed it would be easier to secure the premiership by campaigning for remaining in the EU, then it is likely he would have sided with remaining in the EU.
 
This is not news; many believe politicians are notoriously self-serving, and they do this under the guise of helping society in general. We all know this. However, our sympathy with politicians is short-lived when they make very little progress on Brexit, which is to the detriment of all the other major issues we face today; issues like climate change, the NHS, education and increased homelessness, to name a few.

According to Boris, it’s do or die by the 31st October. Either we leave with an improved deal or we crash out the EU on this date. There are a few problems with this approach. Firstly, he is claiming that he can secure a better deal with the EU than Theresa May could. Boris likes to think of himself as fairly Churchillian with his use of the English language. However, as Winston Churchill used the English Language to rally the country around him in the face of annihilation, Boris, on the other hand, has a country divided and no impressive use of the English language will do anything to unite the whole country or solve issues like the Irish backstop.
 
Perhaps Boris can use his impressive oratory skills at the negotiating table? The only problem with this is the fact that there is nobody sitting at the table. Michel Barnier has already made it clear that the deal struck with Theresa May was final. Furthermore, we doubt that Boris’s linguistic skills extend to negotiating with the EU. He can try but, in all likelihood, Michel Barnier will simply respond with ‘Je ne comprends pas’ – so a better deal seems unlikely.
 
Boris Johnson is somewhat renowned for his political accidents and behaviour. In some circles, these are seen as one of his enduring qualities however, we would argue competency should probably be any prime ministers’ finest quality. Even before he took the reins, he managed to get himself into hot water. In his quest to beat Jeremy Hunt he announced that should he not get an improved deal he would suspend parliament come October to ensure that the UK could leave without a deal. This was to appeal to the hard Brexiteers within the Tory party membership. Pro-remain MPs who were alarmed at this announcement put it to a vote in the commons, whereby any proposal to suspend parliament to force through a deal was soundly beaten. If Boris thought he had a winning poker hand, he would do well to keep his cards hidden before playing his hand in future. Any experienced politician could have told him this.
 
Boris is already having his hands tied before he walks through the door of Downing Street, so we find it hard to see how he can make any real strides towards finding a resolution. This could throw up any number of different scenarios. A possible general election maybe? We hope not - this would only add further confusion and division, after all, the likelihood that the Conservatives or Labour could win a majority is low. Other scenarios are a possible vote of no confidence, or possibly the Conservatives losing their majority, with a small number of Tory MPs switching allegiance to another party.
 
Overall, it’s not difficult to see why the general public is becoming more disillusioned with the on-going Brexit squabbling. We think whether we stay in the EU or leave most people just want to put this to bed. Rest assured, we are not anymore enthused writing about Brexit any more than you are reading about it. Let’s hope there is some progress!
 
It is no secret Boris Johnson greatly admired Winston Churchill, and perhaps Boris has been inspired by one of his quotes: ‘In war, you can only be killed once, but in politics, many times’. Despite all his previous blunders Boris certainly seems to have the knack of perseverance. Let’s hope that now he has the top-job, he can surprise us all by solving the Brexit conundrum while leaving as few people as possible upset at the outcome. (Source: Winston Churchill, Oxfordreference.com)

What does this mean for markets? Due to the political climate being so intrinsically linked to markets we are afraid they are skipping and repeating as well. Expect more of the same.

 

Sterling at 2-year low on no-deal Brexit concerns

Sterling remained on its downwards trajectory last week, falling to levels last seen in 2017 as the gloom surrounding Brexit continued to take hold. With Boris Johnson being made PM, this has raised concerns that the UK could crash out of the EU in October despite Parliament last week voting to block the new PM from suspending Parliament to force through a no-deal Brexit. The domestic currency declined by -0.5% against the Dollar and -0.2% versus the Euro to $1.250 and €1.11 respectively.
 
In other news, global equity markets traded modestly lower as the second quarter earnings season kicked off in the US. Profits are expected to be roughly flat across the board, a solid outcome given the surge in profits last year on the back of Trump’s tax cuts. The S&P500 declined by -1.2% with Japanese (-1.0%) and European indices also falling during the week. Domestically, the FTSE100 was flat whilst the mid-cap focused FTSE250 rose by +0.4%.
 
Bond yields continued to creep lower on both sides of the Atlantic. Fed Chairman Jerome Powell reiterated that the US Central Bank is prepared to step in and provide assistance given heightened macro uncertainty which led the US 10-year Treasury yield 6 basis points lower to 2.05%. The Fed is expected to cut its base rate at next week’s policy meeting, potentially by as much as 50bps. Gilt yields also moved lower as the market priced in a higher probability of a Bank of England rate before the end of the year. The 10-year declined by 10bps to 0.74%.
 
In the commodity markets, oil remained under pressure despite elevated tensions in the Middle East. Brent crude fell by -6.4% to $62.47 a barrel with production continuing to outstrip demand. Gold meanwhile, continued its recent resurgence. The precious metal rose by +1.5% over the course of the week to $1,429 an ounce.

 

The week ahead

Politics has taken the spotlight this week, domestically at least, with Boris Johnson named as the next Prime Minister after circa 160,000 conservative party members cast their votes on Monday evening. Mrs May is due to hold her final Prime Minister’s Questions on Wednesday before officially offering her resignation to the Queen. Parliament is then due to go on summer recess at the end of the week until September 3rd, when the twice-postponed Brexit deadline will once again be looming.
 
Whilst, there is little in the way of UK economic data scheduled this week, overseas news includes updated Purchasing Managers Index (PMI) data across Europe and the US. The European Central bank is also due to hold its latest policy meeting on Thursday with the possibility of a rate cut and/or further easing measures to boost economic growth, open for discussion. Finally, an advance estimate of second quarter Gross Domestic Product (GDP) in the US is due on Friday.

 

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