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Politics provided the ammunition for market movements this week. While, the US and China began the week still bristling at each other, UK prime minister Boris Johnson made a surprise gambit that could increase the likelihood of a ‘no deal’ Brexit.
The current tension between China and the US is at once disquieting and yet almost tediously familiar. After last week’s tariff and tweet exchange roiled markets, this week, conciliatory words from China’s government acted as a balm for frayed nerves. Liu He, Chinese vice premier, said that China “resolutely opposes the escalation of the trade war”.
Hopes of a ceasefire pushed US stocks higher over the week and the S&P 500 Index was up 2.7% at its close on Thursday. China’s Shanghai and Shenzen markets fared worse, with the CSI 300 falling 0.8%. Bond markets hinted at future uncertainty, however. Yields on long-dated US government bonds touched record lows, falling below those of their short-dated equivalents. Such news suggests recession could be on the way, as it usually means investors expect economic growth to stay weak and inflation to remain low. Indeed, the dividend yield of the S&P 500 Index is now higher than the yield you can obtain from a 30-year Treasury bond. This has happened only once in the post-Bretton Woods era, and that was during the 2008/09 financial crisis.
Germany is already teetering on the brink of recession. An official report showed that Europe’s largest economy contracted in the second quarter of this year and a survey from the Ifo Institute indicated that business confidence was at its lowest level in seven years. Nevertheless, the FTSE World Europe (ex UK) Index rose 1.7%.
Bond yields in Europe continued their relentless march downwards. The German 10-year yield reached a new low. And 68% of all European government issuance now yields under 0. In investment-grade corporate bond land, that figure is 45%. Among the ‘high yielders’, Italian 10-year bond yields plummeted to below 1% as a new coalition government was formed. The Greek equivalent fell nearly 40 basis points to 1.56% as capital controls in Greece are due to end.
(pro)Rogue One?
Meanwhile, UK prime minister Boris Johnson surprised many by ‘proroguing’ Parliament, extending a planned suspension. The move, which had to be approved by the Queen, leaves MPs with less time to prevent the UK from leaving the European Union without a trade agreement on 31 October. Critics have called Mr Johnson’s decision “an affront to democracy” and a “constitutional outrage.” The prime minister, however, contends that a break is overdue, as the current session of parliament is the longest since the 17th century, having run for over two years. He also says it is necessary in order to bring forward “bold and ambitious” changes to domestic legislation. Sterling fell below $1.22 on increased fears of a no deal Brexit. The UK currency is up 1.2% in August on a trade-weighted basis, however. The FTSE 100 gained 1.3% - a cheaper pound increases overseas earnings potential for the UK’s large companies.
Mark Carney, governor of the Bank of England (BoE), was another proponent of radical ideas this week. At an annual gathering of central bankers in Wyoming, Mr Carney suggested that a digital equivalent could replace the US dollar as the world’s reserve currency. Since his appointment in 2013, critics have rejected Carney-fans’ claims of superhuman abilities, but will monetary authorities soon be storing (Jackson) Hole-y Cryptobytes?
Tar wars?
On Tuesday, it was revealed that talks about a potential $210 billion merger were underway between tobacco giants Philip Morris International (PMI) and Altria. Previously part of the same entity, US regulations forced a split into two companies over ten years ago. But hopes of the two rekindling a spark could be stubbed out by the technical terms of the deal. Altria shareholders are said to be concerned over the lack of premium offered by PMI. The deal could also ignite competition concerns. Shares in Altria were down 4.7% over the week, while those in PMI dropped 10.5%.
And finally...
Feeling famished? You might want to pop into The George Pub & Grill in County Durham, where they’ve created an eating challenge inspired by Man v. Food, the US TV series about competitive eating. The George is daring peckish patrons to consume its 1.5kg ‘Big Ben Number 10’ burger, a mammoth meal consisting of 10 beef patties smothered in cheese and bacon, with a side of fries. The 12,000-calorie dish comes with a unique twist, however. While the pub’s management is warning customers to eat the burger at their own risk, it will offer compensation to the family of anyone who finds themselves in a mortal pickle: £500 towards the cost of a tombstone. A grave offer, indeed. Lettuce hope that those who have mustard the appetite to take on the Big Ben Number 10 don’t find their decision ketching-up with
