The Weekly - To Tweet or not to Tweet

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04/12/2017
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Last weekend saw Donald Trump secure a major legislative breakthrough, with his much feted corporate and personal tax cuts passing through the Senate. In what should have been seen as a major political victory for the Trump administration, it was overshadowed by Trump retweeting three anti-Muslim videos from the Britain First deputy leader, Jayda Fransen.

While Twitter was partially responsible for the election of Donald Trump it is also perhaps going to be the source of his downfall. His uncivil discourse and his inability to accept any criticism detracts from any success his administration has enjoyed. The US economy continues to grow at around 3.5%, and these tax reforms should only inject further growth into the US economy. This is also against a backdrop of strong US manufacturing data and low unemployment. Providing the bill makes it through the House of Representatives, which is expected, it is likely to be signed into law by Christmas.

The US stock market has also grown significantly since the election of Donald Trump, with much of these gains a reflection of the tax reforms. Where the US markets go from here is anyone’s guess, but US companies have to live up to these tax reforms otherwise they will struggle to justify their lofty valuations. Over $2 trillion has been added to the US markets since the election of Trump, while the expected tax cuts are going to add $1.5 trillion to the US debt pile over the next ten years.

Now these reforms are as good as passed it remains to be seen whether they will benefit all Americans and not just the few. If it’s the latter then Donald Trump will face some difficulty at the US mid-term elections in November 2018. If Trump fails to maintain the Republican’s firm grip on the Senate and Congress then there are already murmurings that he won’t be able to continue in the top job to see out his first term, let alone contest for a second.

On the face of it, and only taking into account the economic figures, there is not much on which to criticise Donald Trump. The biggest threat to Donald Trump’s presidency is his unbecoming conduct, his fragile ego, and of course his Twitter account.

Meanwhile, in the UK, whilst Theresa May was rebuking Trump or being rebuked herself she was facing a few other domestic problems of her own. It appears her right hand man, Damien Green, has been accused of using his ministerial laptop for perusing and downloading some inappropriate material. Although he denies the allegations there are those already clamouring for his resignation. Furthermore, Mrs May’s social mobility tsar and the rest of the social mobility board all resigned due to the governments’ sole focus on Brexit, which they say has caused the neglect of the growing issue of closing the gap between the rich and poor.

Amongst this chaotic backdrop of problems, it seems that Theresa May has single handily taken the reigns of the Brexit negotiations by offering the EU £50 billion in order for trade talks to progress this week. If this is not enough to secure a trade deal with the EU then a hard Brexit is very much on the cards, especially as some kind of hard border in Ireland is looking inevitable.

There are those that already think this figure is too much and are calling for a second referendum, which isn’t going to happen. Even if the EU thinks this is a significant commitment from the UK, there is no cast iron guarantee that this is going to stand up in the long run, much like our embattled Prime Minister!

This is not because we think she is or isn’t doing a good job, but when drinking from a poisoned chalice the outcome is inevitable. Whether Theresa May is a victim of her own party or the Labour party remains to be seen, but the infighting from within the Conservative party has already led some leading City institutions to come out last week to say that the UK should prepare for a Jeremy Corbyn government. However this was followed with the caveat that this outcome, coupled with Brexit, is also the reason why the UK stock markets are underperforming their peers.

Some perceived progress with the EU may also prohibit a Santa rally as a rise in Sterling will devalue the overseas earnings of many of the constituents of the FTSE 100. What is certain is that as politics in the West becomes more and more fragmented, its sphere of influence around the world is receding. This plays into the hands of Russia and China looking to fill any void left by the West. Small wonder that tweeting by their leaders, indeed by much of their respective populations, features little in their cultural psyche.

Sterling climbs modestly on Brexit hopes

The value of Sterling appreciated against most major currencies last week in response to reported progress in initial Brexit negotiations. UK equity large-caps which are rich with overseas earners lost ground as a result, the FTSE 100 shedding -1.5%.

The Pound gained +1.6% against the Euro and +1.0% against the US Dollar as the United Kingdom and the European Union are reported to have largely agreed on at least a framework for calculating the so called Divorce bill. The Irish border remains a sticking point but UK officials, it is believed, are keen to move the discussion along to the future trade relationship between the two sides.

The UK and European economies both enjoyed very positive manufacturing news last week as new Purchasing Managers Index (PMI) data returned its highest readings in several years. PMIs are a measure of business activity and a commonly seen as a leading indicator for economic momentum. UK manufacturing recorded its highest reading since December 2013 whilst Europe marked its best level since early 2000. European equity markets though closed the week marginally lower; Germany’s DAX 30 falling -1.5% whilst the French CAC 40 lost -1.4%.

In the US, economic growth during the third quarter was revised higher to an annualised rate of 3.3%, up from the 3% reported a month ago. The improvement was largely expected following the release of a number of improved economic indicators since the previous estimate. The US economy also benefitted last week from reassuring housing data and a consumer confidence reading that reached a 17-year high despite ongoing geopolitical threats. The S&P 500 closed the week’s trading +1.5% higher.

Commodity markets were little moved last week, despite last Wednesday’s OPEC meeting which saw OPEC and non-OPEC members have agreed to extend oil production cuts through the end of 2018. The price of Brent crude oil, the primarily European benchmark, was largely flat on the week but remains 20.8% higher over the course of three months.

The Week Ahead

It’s another busy week of macro data with notable releases coming from all of the world’s major economies. Domestically, PMI’s covering the Services and Construction sectors follow last week’s healthy manufacturing number. In the US, the labour market comes back into the focus with the latest monthly report due on Friday covering all important areas such as unemployment, non-farm payroll additions and wage growth. In the Eurozone, the final revision of Q3 GDP is released tomorrow although no change to the +0.6% previously calculated is expected. Other data from the Bloc includes retail sales and the latest PMI’s for November. In China, CPI inflation and trade data due on Friday is the standout with the Caixin PMI for the Services sector released tomorrow. PMI’s are also expected in China, both government calculated which focuses on the larger companies and state entities in the country and media/research group Caixin which looks at the smaller companies. CPI inflation and trade data will also be released by the close of play on Friday. Like in the Eurozone, Japan also releases an updated calculation of Q3 GDP which economists expect to be upgraded by 10 basis points to +0.4% QoQ.