Submitted by Michael Every of Rabobank
Back with a bang
As mentioned on Friday, welcome to both La Grande rentrée and weltschmerz: and combining the two, this week we are ‘back with a bang’. That seems appropriate given yesterday marked 80 years since the start of WW2, which one would have thought would have received far more media coverage than it did: instead, far more focus was on how similar some conditions are to the lead up to WW2.
For just one market example, yesterday saw new US and Chinese tariffs kick in, taking a further step down the trade war path - if that is what one still insists on calling it. I underline that more holistic view of the US-China standoff as the Wall Street Journal reports that “SEC Revives Fight Over Inability to Inspect Chinese Auditors of Alibaba, Baidu”. The SEC could yet “impose more oversight on US-listed companies that rely upon those [Chinese] auditors. The measures could include forcing the firms to disclose more about their business or accounting and restricting their ability to sell new shares.” Given the Chinese firms are unlikely to comply, that is a potential step towards an eventual US delisting; and don’t forget there is also a push in the US Congress to stop US capital flows into China via bill S. 1731, which will get a further bipartisan tailwind when Congress returns on 4 September. In short, this is a whole other new front in the US-China struggle (capital flows, following tech limits and tariffs), not a ‘trade war’.
Let’s see just how weak CNY fixing, and CNY itself, are today. Indeed, after the Chinese manufacturing PMI stayed well below 50 over the weekend, will we take out the low of 7.1926 on the back of this news-flow? If not today, then soon, surely. And then where?
In the UK we also have a crucial week where political analysts agree anything could happen: the UK’s relations with the EU; the fabric of the UK constitution in terms of legislature vs. executive; and even the UK’s internal relations with its own constituent countries, could all be permanently changed. The latest news suggests PM Johnson is still taking the hardest of lines and any Tory rebels prepared to vote with the opposition in a vote of no confidence, or to support a parliamentary procedure to force the government to request an extension of Article 50, will lose the whip and be de-selected as candidates at the next election: in other words the end of their political careers. There have even been mutterings about action to remove the controversial House Speaker, John Bercow (he of “Ordaaaa!” fame) due to his widely-regarded Remainer sympathies; and of Johnson himself, or a populist ally within the EU, such as Victor Orban of Hungary, then vetoing the UK request for an extension within the EU’s political architecture should it be passed.
Meanwhile, that career-ending UK election may be arriving even sooner than we had thought – in which case prepare for the angriest, nastiest “In Forever vs. Out Now!” election campaign. And recall it will be one where “In Forever” means the most radical left-wing economic policies seen in the UK since 1945 under a Corbyn government.
What else can we throw into the mix today?
How about Germany’s far-right AfD being projected to achieve 27.8% of the vote in Saxony and 23.5% in Brandenburg? Yes, they are not in power, or even close to power, but this is with low unemployment and what had been until recently a healthy German economy. Quite the worrying historical irony there.
How about former Far-right Italian Deputy PM Salvini, now out of power, calling for his supporters to march on Rome? True, that’s more 1920s than 1930s, but given the technocratic PD look like they will be running the finance ministry again, where they did so well last time that we ended up with a populist government, many are betting that Salvini will be back with a majority at some point.
How about Argentina reintroducing capital controls (yet again)? Well, they have. Exporters now have to repatriate USD within five days, and central-bank authorization is now required to buy USD, except in the case of foreign trade. Individuals will be limited to purchasing USD10,000 per month. Correct me if I am wrong, but wasn’t the Argentina bail-out the benchmark achievement of one Christine Lagarde, now about to run the ECB? I am asking for a friend…
And literally talking of ‘back with a bang’, yesterday we came perilously close to the start of a full-blown conflict between Israel and Hezbollah, which fortunately appears to still be lurking for some future date for now. That might sound irrelevant for a market already looking at the map with an expression like Munch’s ‘The Scream’ and asking “Where next?”, but when/if that war occurs it risks a far larger regional conflagration.
Meanwhile, against this geopolitical backdrop we return from the summer to continue to see global markets which now aggressively buy equities for their yield and bonds for capital appreciation: which is a brilliant strategy until rates have been cut to new negative terminal lows and stock multiple expansion is at new highs: at which point the music stops and someone is left holding seriously over-priced and under-delivering cans. And nobody makes any returns at all – which will be a real big bang.