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GDPR? No – far more interesting news!

25 May 2018

I suspect most will remember this 4th week in May of 2018 as GDPR email madness week.

For us and investors the week had far more interesting aspects than businesses turning data protection into a Y2K déjà vu.

Politicians who believe their success lies in ripping up political convention and employing disruptive strategies – suffered setbacks. Turkey’s strongman Erdogan threw his country into a currency crisis when after trying to apply the same bullying tactics he normally uses on his political opponents to international capital markets. I must admit to taking pleasure from him being humbled and forced to ‘apologise’.

Italy’s populists were next, when markets in Italian bonds staged somewhat of a tantrum upon their agreement to actually forming a government. Like Erdogan, they similarly quickly distanced themselves from some of their more extreme plans from the campaign days like cancelling government bonds or leaving the Euro. They may have taken comfort from their bond yields still not exceeding those paid on US government bonds – except that in Italy they jolted upwards as a result of fear of decline, whereas in the US yields have gradually risen in expectation of future growth.

Trump suffered a personal defeat when he was forced to cancel the planned summit with ‘little rocket man’ Kim Jong-un after North Korea’s leadership reacted very robustly to suggestions of senior members of the Trump administration that the denuclearisation of North Korea might be achieved in the same way as it was with Libya (!). As we had suggested a few weeks ago: it is one thing to force your opponents to the negotiating table, but if you don’t have a good plan what sort of deal to exactly negotiate for then little more than embarrassment has been achieved.

The administration’s trade negotiations with China suffered a similar fate. With Trump’s negotiation team deeply divided in what they aim to achieve they managed to generate so much confusion over the likely path and outcome during the course of the week that one feels inclined to draw similarities to the UK’s uncertainties over post Brexit trade relations. At least it has given the Chinese side a temporary advantage by preserving the status quo for the time being.

On the capital markets side the US and UK central banks strived to assure those who follow their communications closely that their actions will remain predictable by being determined by economic and monetary conditions rather than a sudden surge of dogmatism. The Bank of England’s governor Mark Carney made his remarks as part of a speech at an economist’s dinner that I had the pleasure to attend. The content was widely reported in the financial press afterwards, but only those present appear to have noticed how he seemed to revive the spirit of Mario Draghi’s ‘whatever it takes’ speech at the height of the Eurozone Crisis, when he said: “We are ready for Brexit whatever form it takes”.

Such words will have been welcomed by all who felt despair over yet another week of ‘non-progress’ in the Brexit negotiations, although the head of the BoE was also frank in his assessment that the negative economic impact of the Brexit decision on the UK so far had been quite close to their original projections – which had been ridiculed by Brexiteer critiques when they only materialised with some delay.

Meanwhile economic data flow continues to confirm that global growth has come off the boil and the growth leadership baton has passed from Europe back to the US, which is enjoying a substantial fiscal stimulus through Trump’s debt financed tax breaks, whereas demand for European capital goods has fallen back as a consequence of the strengthened Euro-€. At the same time though, the recently observed headwinds from currency, cost of capital (credit yields) and money supply deteriorations appear to be easing. This may or may not be the beginning of improving economic news flow, but if it is then this would be good news particularly for emerging markets, but also European exporters.

2018 economic and currency developments have followed quite closely the path we had anticipated at the beginning of the year, except that the economic slowdown had only been expected for the second half of the year. With overheating conditions clearly having been avoided there is a fair chance that H2/2018 will turn into a far better second half of the year than had been anticipated at the beginning of the year. Notwithstanding such improvements, corporate earnings will have to slow over the coming quarter as a result of the economic slowing. In the US this may be exacerbated by the slowing effect that uncertainty over future trading condition can create – as we in Britain only know too well now.

US growth leadership may therefore end sooner and be passed on than the Trump administration likes to believe. That is unless Trump’s administration can pull a few more ‘rabbits out of the hat’ like the fiscal stimulus of last year’s tax reform. The hints on Friday evening by the US president and people around him that the summit with North Korea may against all odds still happen in June, makes me think that his unpredictability is still going strong and that the array of possible outcomes may be far wider than we currently anticipate on the basis of our past experience.

Markets are not keen on unpredictability plus falling earnings growth rates, which puts continued market volatility on the cards. However, over the past week we have seen the first – if faint – indicators that this mini-cycle slowdown that started at the beginning of the year may have run its course. Watch this space.