Markets during August were given the washing machine treatment – tumbling this way and that with a long-term trend being counted in minutes. Nerves were alive and well as tariff tensions increased; Donald Trump lambasted the Federal Reserve with some extraordinary comments; the Brexit hoo-ha continued; Italian politics resumed its standard chaotic state as the Prime Minister resigned; Hong Kong descended into strong resemblance of civil war; Greenland appeared in the headlines when Mr Trump (yes, him again) suggested it would be a smart idea to buy it – essentially a “large real estate deal”; whilst slowing growth seemed to emerge everywhere. And much, much, more to keep the markets on edge.
At the time of writing the US-imposed China tariffs are set to increase to 30% (from 25%) on approximately $250 billion of goods from October 1st whilst tariffs on $300 billion of goods will be taxed at 15% (from 10%) in two tranches – on September 1st and December 15th – or not. To say the situation is fluid is an understatement as every time Donald Trump comments on the matter the goalposts seem to shift. China has retaliated although those details also remain ‘fluid’ and Mr Trump has bounced back by “demanding” that US businesses move operations out of China. You couldn’t make this stuff up.
Tariffs, as we have repeatedly remarked, are very bad business. They impact economic growth, adversely, everywhere. Many US businesses are already feeling the pinch from higher import prices and curtailed supply chains whilst the great Chinese export machine is sputtering. The slowdown in China is directly hitting other front-line exporters such as Germany and Japan.
Mr Trump, never one to waste a day without some extraordinary tweets said: “My only question is, who is our bigger enemy, Jay Powell or Chairman Xi.” To the uninitiated Mr Powell is Chairman of the US Federal Reserve whilst Chairman Xi is, of course, China’s supremo. President Trump believes the “Fed” should have reduced interest rates by at least a full percentage point at the end of July when it opted for “only” 25 basis points. We emphatically disagree – particularly since the “Fed” has stopped the gradual shrinkage of its enormously bloated balance sheet. Quantitative easing is once again a reality whilst quantitative tightening is well and truly buried.
Other news from around the world
Central banks in other countries that have also recently reduced their key interest rate include: New Zealand, Australia, Russia, Chile, South Korea, Brazil, South Africa, Mexico, Saudi Arabia, India and Turkey. It is expected that the European Central Bank will cut its deposit rate next month – probably to a negative 0.5%. Robust world in which we are living isn’t it!
As seems always to be the case it is difficult to make sensible comment about Brexit as the final form is still unknown whilst politicians and civil servants on both sides of the channel do their very best to frustrate every initiative – of whatever character. Boris Johnson has brought his unique bluster and effervescence to the debate and appears to have weathered the G7 summit in France without any damage and a significant and surprising lack of gaffes.
As we have remarked many times we are content for Britain to exit the EU providing the “deal”, if there is to be one, doesn’t lock the country into the Customs Union for an indeterminate period. If it does, leaving the EU is a complete waste of time.
The events in Hong Kong are disturbing. Conspiracy theorists speculate that the ongoing and increasingly violent protests are stage-managed by Beijing to provide an excuse for total take-over and integration. We don’t know if there is any truth in the theory but the energy now being thrown into the protests could be counterproductive. In the meantime the Hong Kong economy is being seriously wounded and even if peace were suddenly to break-out it is likely that inbound tourism will be damaged for quite some time.
The Italian Prime Minister, Giuseppe Conte, resigned on August 20th and promptly launched a withering attack on his deputy, Mattel Salvini. Mr Salvini leads the anti-immigrant far-right League party which was in coalition with the populist anti-establishment Five Star Movement until early August when Mr Salvini pulled the plug by announcing he could no longer work with his coalition partner. Mr Conte, a law professor, with no previous political experience, was installed as a compromise Prime Minister 14 months ago. He is not a member of any political party but is considered an ally of the Five Star Movement.
In a hastily cobbled together marriage of convenience a new coalition has now been arranged between the Five Star Movement and the former opposition, the centre-left Democratic Party (PD). The point being to frustrate Mr Salvini’s leadership ambitions despite his party being the most popular amongst the voters. It has been agreed that Mr Conte will again be the Prime Minister. So we now have the odd situation where Five Star has moved from a coalition with a right-wing party to one with a centre-left party. Does this sound like a stable long-term arrangement? Meanwhile, Mr Salvini will be biding his time in the wings. Expect more ructions.
Leading Italy is a tough gig. It is surprising anyone wants the job. The country can’t grow fast enough to escape its huge public debt burden, the banking sector remains in a fragile condition and demographics (ageing population) are the most adverse in Western Europe. And, of course, being part of the eurozone provides no exchange rate manoeuvrability whilst fiscal flexibility is strictly limited.