Adapting to Change

Will we drop the green baton?

The IMF has called upon governments to pick up the baton from central banks and undertake fiscal stimulus. Central banks remain in supportive mode providing stimulus for the global economy. However, while the US Federal Reserve has a bit more scope to cut interest rates, it does feel as if the European Central Bank is ‘pushing on a bit of string’ due to record low bond yields.

Given the increasing concern about global warming, could investment projects which address climate change be a good place to start? The Global Commission on Adaptation, that has Bill Gates as its Co-Chair, has recently issued a report that suggests some $1.8trillion should be invested over the next ten years on measures to adapt to climate change. It estimates that this could produce net benefits of over $7trillion, including avoiding future financial losses from climate change events such as hurricanes and flooding.

Amongst some of the environmental investment projects suggested in the report are more storm warning systems, painting building rooftops white to reflect heat, restoring mangrove forests to protect coastlines, reducing water leakage and helping farmers to switch to more drought-resistant crop varieties.

In the UK, the government has ‘turned the page on austerity’ and believes it is better positioned to fund infrastructure projects to support long-term economic growth, but in the current parliamentary hiatus, little can be agreed. The HS2 debacle does not inspire confidence. However, the recent announcement that five new Royal Navy Type 31 frigates are to be built in the UK is more encouraging and hopefully may prove to be a renaissance for UK shipbuilding.

What have we been watching?

Trade tariff uncertainty continues to overhang markets. Weaker than expected US manufacturing and service sector activity sent a shock wave across global markets last week. The World Trade Organisation (WTO) also cut its forecast for growth in global trade for 2019 from 2.6% to 1.2%.

Markets will now focus on trade talks between China and the US. An impeachment of President Trump is now probable, but a Senate conviction looks a tall order given Republican party control. Impeachment is likely to complicate trade talks. US officials denied last week’s media reports that the Trump administration is planning to block Chinese companies listing in the US. Might this position change if there is no progress on trade talks? Hopes of the US delaying the imposition of tariffs in return for China buying more American agricultural products also feels overly optimistic.

Meanwhile, the World Trade Organisation has given the US the go-ahead to impose tariffs on $7.5bn of EU goods in the prolonged row between the US and EU over Boeing and Airbus subsidies. Even Scotch malt whisky is caught in the ‘cross fire’, with a 25% tariff on exports to the US. No wonder trade tariff uncertainty is worrying investors.

PM Boris Johnson delivered his final ’take it or leave it’ Brexit plan to address the Irish backstop. Ahead of the EU summit on 17^th/18^th October, French President Emmanuel Macron has effectively given Boris Johnson until Friday to submit a revised proposal. Meanwhile, Boris Johnson still appears determined to leave on 31^st October and the PM is considering going to the Supreme Court to avoid a Brexit extension. The Brexit Secretary has said talks had been held with Labour MPs in pro-Brexit constituencies to secure support for a Brexit deal. Finally, Parliament is set to be prorogued tomorrow ahead of the Queen’s speech on 14^th October. With both sides playing the blame game but still everything to play for, Sterling remained around $1.23.

In the UK, manufacturing activity remained subdued for the fifth-month in a row albeit the pace of contraction eased slightly in August. Meanwhile, the Nationwide reported house price growth ‘almost ground to a halt’ in September. However, this appears due to Brexit uncertainty holding buyers back rather than a lack of interest. UK construction activity was lower in September with Brexit uncertainty resulting in hesitancy among clients according to building firms. Finally, activity in the important service sector contracted in September, touching a six-month low.

In Europe, growth concerns were reflected in the Euro which dropped to a 28-month low against the US Dollar, following weak German inflation and ‘flash’ eurozone manufacturing activity in September which remains in contraction territory and at its lowest level since 2012. Export sales were especially weak.

In the US, manufacturing activity contracted further in September, falling to a ten-year low. Activity in the service sector was also much lower than expected and touched a three-year low. Following the release of this data the US financial futures market is pricing in an 80% chance of an interest rate cut later this month.

In Japan, industrial production contracted more than expected in August but retail sales were better than expected ahead of a sales tax increase.

In China, democracy protests continued in Hong Kong as the country celebrated the 70^th anniversary of Communist rule in the country. The People’s Bank of China said it would step up counter-cyclical measures to help the economy. In the meantime, Chinese manufacturing activity data for September was better than expected and the highest level so far this year.

With Saudi Arabian oil production back to normal, Brent oil drifted back to $58 reflecting global growth concerns.

Finally, some jobs are just too challenging. Apparently, Hong Kong’s government has contacted eight public relations firms to try and rebuild the city’s image but all of them have declined the contract.

Read Last Week’s Alpha Bites – He-lp

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