Brexit and Trade Tensions were both reasons for investors to sit up and pay attention during July, as both grabbed the headlines and impacted markets.
The ongoing divorce settlement with the EU ramped up during the month following the resignations of a number of Conservative party members. This saw David Davis resign as Brexit Secretary quickly followed by Boris Johnson resigning as Foreign Secretary, the catalyst being Theresa May’s Chequers deal. To add insult to injury the Customs Union was then swiftly rejected by the EU, with chief EU negotiator Michel Barnier saying he will never accept her plan. Negotiations will continue over the next few months and in our view this will lead to an outcome as Theresa May's weakness at home could strengthen her negotiating power as the Europeans will be aware that there is only so far they can push their agenda. However, these developments have also increased the possibility of a “no deal” scenario and if that event was to unfold then expect to see sterling weakening again, in a similar fashion to immediately after the referendum vote, albeit from a lower level and to a smaller extent. Looking ahead, expect the Brexit momentum to remain over the next few months as we look to work to an agreement on key issues by October. As has been the case since the referendum, the price of sterling provides a good indicator of how things are developing, more recently it's been on the back-foot as we hover around $1.30.
Trade Tensions took opposite paths in July. As Jean-Claude Juncker met with Donald Trump it appears that the EU and US will work towards a trade agreement and repairing their relationship. Whereas the US and China are heading for a messy break-up which looks set to continue with the US increasing the number of tariffs applied to Chinese imports to $200bn from $50bn. In typical Trump style he is really tightening the screw and has suggested he'd be willing to impose tariffs on all $500bn of Chinese imports. China has retaliated with like-for-like tariffs but crucially in July started to intervene to weaken their currency. Why does this matter? This ongoing theme is a headwind for global economic growth and adds a level of uncertainty to investors which is causing equity markets to remain volatile.
As we move into Summer holiday season expect a busier month than normal as the US plan to increase tariffs goes to the Senate with a decision expected at the end of August. Closer to home the Bank of England has increased interest rates to 0.75% at the beginning of August which is the highest level in the aftermath of the financial crisis.
Deputy Chief Investment Officer