WeekWatch 09/12/2019 - Election Gambles, US Job Growth, Germany at Risk

Getting the family together at Christmas is something many of us look forward to and dread in equal measure. It’s a time to reconnect with relatives we haven’t seen all year, and can be good fun - until someone mentions politics. It seems last week’s NATO conference was no different, as celebrations at Buckingham Palace were punctuated by spats about trade wars and lengthy press conferences. The mood was decidedly un-festive.

While Prime Minister Boris Johnson welcomed world leaders to Downing Street, investors were busy hedging their bets for Friday’s election result. With the Tories polling a steady ten points ahead of Labour, the pound soared to a 31-month high against the dollar on Thursday as traders rallied behind a Conservative majority. While sterling is back above its 2016 level – for now – it is still at the mercy of politics, and is likely to remain volatile well into the New Year as the future of the UK’s relationship with the EU remains uncertain. 

The week saw Johnson outline plans for his first 100 days in office if he wins the election. He promised to pass his Brexit deal and hold a February Budget in that time, but other news from the week suggested he’ll have plenty to keep him busy during those three months.

PMI data from the manufacturing and private services sectors suggested the UK economy is stagnating – or even contracting – so far this quarter, with both indicators dropping month-on-month since October. House prices jumped last month, and a report by the ONS showed that wealth inequality is on the rise. This will likely increase the pressure for a February Budget to honour promises made in the Conservative manifesto. The Prime Minister may well be haunted by his pledges of Christmas past, present and future – but time will tell.

As President Trump arrived home from London on Thursday, House Democrats announced impeachment charges against him for alleged abuse of power. The news followed a busy week for ‘the tariff man.’ After threatening duties on Brazil and Argentina on Monday, and France and the rest of Europe on Tuesday, markets around the world were shaky by Wednesday. They rallied on Friday following signs of progress with China (which waived tariffs on imports of soybeans and pork) and a stellar US jobs report.

The US economy surpassed economists’ predictions, generating 266,000 new jobs in November. This suggests the US is – by and large – shrugging off the trade wars. Wage growth continued, and will help sustain consumer confidence, which has been solid all year. “We have so far seen no impact on US consumers, who continue to carry the economy,” said Jim Henderson of Aristotle Capital Management, manager of the St. James’s Place North American Fund. “That’s largely because the impact of the tariffs has been felt elsewhere, whether by the wholesalers or through China devaluing its currency.”

French president Emmanuel Macron clashed with Trump at a NATO press conference, and returned home to nationwide protests against proposed reforms to the pension system. Macron is now facing a second wave of unrest, a year after the gilets jaunes movement struck Paris last November.

In Vienna, OPEC agreed to cut oil production by 500,000 barrels a day, causing a sharp drop in oil prices. The move came a day after Saudi Aramco’s IPO, which valued the company at $25.6bn. It is now the world’s most valuable publicly-traded company, overtaking Microsoft Corp. and Apple Inc.

Data released on Friday showed that Germany is suffering its biggest industrial slump in ten years. Output was 5.3% lower year-on-year, worse than forecast. It’s clear the country has suffered more than most in the global manufacturing slowdown of the last six months. The country’s exposure to the auto industry has left it extremely vulnerable to further contraction – figures published last week showed another drop in car sales, driven by falling demand for diesel vehicles.

China seems to be bucking the global manufacturing slowdown, as PMI data released on Friday showed a pick-up in manufacturing activity in November. However, the news was largely eclipsed by data showing the country’s exports are at a nine-month low, with exports to the US falling 23% in November. Over the weekend, thousands of protestors took to the streets once again to mark six months of anti-government action in Hong Kong. The country’s economy is in steep decline, and on track to see GDP fall by 5% in the fourth quarter as the protests continue to affect business activity.

Wealth Check

As election day looms, the main parties’ spending pledges have gone into overdrive. Last week, Boris Johnson added a promise to pass his Brexit deal and bring a Budget within 100 days of getting back into Number Ten. February appears to be the month that we’ll learn more about the new government’s tax and spending plans.

Compared to Labour’s plans, the Tory manifesto certainly suggests less radical tax changes are on the cards if they are returned to power on Thursday. But a Budget held in the middle of the countdown to the end of the tax year risks creating uncertainty and inaction.

What is clear is that the extravagant spending plans laid out by politicians on all sides need to be paid for. That makes tax giveaways less likely and underlines the importance of taking advantage of available tax reliefs and allowances while you can, if it is appropriate to do so.

In the picture

The wholesale cost of the UK Christmas dinner is up 3% from last year, and 12% from 2017, according to commodities data group Mintec. 

Wet weather caused Brussels sprout prices to rise by 11%, while higher summer temperatures led to fewer turkey eggs hatching this season, resulting in prices increasing by 6%. Glazed hams and sausages are expected to be more expensive due to rising demand from China, as African swine fever has pushed prices up 10%.

However, those with a sweet tooth will be pleased to discover that, due to a fall in raisin and sugar prices, the cost of a Christmas pudding is 9% lower.

The last word

"Every election is determined by the people who show up."  - Larry J. Sabato, political scientist

Aristotle is a fund manager for St. James's Place.
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