Review of the Week: Fisheries and finance

Will the pull of the heart prevail against the mind in Brexit negotiations? Will a nasty outbreak of flu be the start of a beautiful friendship between Trump and Xi? Chief investment officer Julian Chillingworth is dubious.

Immediately after the UK bowed out of the EU with a bong on 31 January, UK Prime Minister Boris Johnson and the EU clashed over the future of trade.

The EU wants the UK to maintain ‘equivalence’ with the trading bloc’s rules. The bloc also says that any deal on financial services would have to be linked to continued access to British waters for European fishing companies. It seems a little loony to join at the hip such low-productivity activity to one of the highest-productivity areas. But the sovereignty of British waters has an emotional pull at the gut that the City and all the prosperity it brings simply cannot muster. Could be a sneaky trap …

Mr Johnson said the UK would not be bound to follow EU rules in any future trade deal and that he would walk away from the table before he accepted such terms. The EU responded with a warning that it wouldn’t allow full access to its common market unless it could be sure that the UK wouldn’t try to undercut European rivals by cutting labour protections, environmental laws and other standards. This is a fair point, yet so is Mr Johnson’s reply that in many cases the UK has higher standards than required by the EU. Such conditions aren’t set in stone though, despite Mr Johnson’s insistence that the EU should trust his assurances. Perhaps it was bad timing to fire a former Conservative minister from the presidency of the COP26 UN Climate Change Conference; Claire Perry O’Neill savaged the PM, urging voters “should not trust him”. Oh yes, it’s going to be an interesting year.

Meanwhile, it was a good week for equities. Global markets marched upward despite the continuing concerns about the Wuhan virus. There was a hefty beat for nonfarm payrolls: the US added 225,000 jobs in January, compared with the 160,000 expected by economists. And American companies are posting pretty good results too. About 65% of the S&P 500 has reported fourth-quarter earnings and the lion’s share beat forecasts. At the end of 2019, average quarterly earnings for the benchmark US index were predicted to fall 1.7% on a year earlier. So far, the index’s earnings are running at a 0.7% increase. Utilities, communication services, healthcare and financials are leading the charge, while energy, industrials, basic materials and consumer discretionary have done worst.

UK investors’ overseas returns were compounded by a 2.4% slump in the pound against the dollar last week. These days we tend to leave such abrupt sterling moves on the doorstep of No.10 like an Amazon delivery driver who is used to never seeing the face of his customer. But that reflex can be dangerous – yes, the pound is a good measure of the market’s feelings about Brexit, but Brexit isn’t the only factor affecting the currency. Sterling was pushed higher by phenomenally high trading in dollar-sterling futures in the lead-up to the Bank of England’s interest rate decision on Thursday 30 January (the second such month of suspicious trading, something the Financial Conduct Authority is investigating). This meant last week’s trading started at the end of a peak in the value of sterling, flattering the currency’s fall against a dollar strengthened by the negative effects of the Wuhan virus on global growth.


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Source: FE Analytics, data sterling total return to  7 February

Trading tweets

After almost two years of fighting over trade, the Wuhan virus outbreak appears to be bringing Donald Trump and Xi Jinping together.

It’s a little fitting, as the Wuhan virus appears to be having a significant impact on global trade. As the virus has spread rapidly around China factories have been shut down, offices are closed and the streets are bare. No-one is shopping, orders aren’t getting filled and trade is seizing up. The effect of this outbreak was always going to be driven by how people reacted to the danger posed. We’ve begun to see that, in large swathes of China at least, people are more inclined to hunker down at home than take the risk of catching it. That could have a significant effect on China’s GDP growth, which would leak out to other nations as well through lessened demand for goods and services in the Middle Kingdom.

Bloomberg quotes industry sources saying the crisis is cutting China’s oil demand by 3 million barrels of crude oil each day. JPMorgan estimated the virus would shrink China’s oil usage by 300,000 barrels a day averaged across 2020, but they have since reassessed this guess to 70,000. Getting these sorts of estimates right is like throwing a dart at a moving target after being spun round a few times. You’re definitely going to miss, but if you do it every day of your life you should start to hit the general vicinity. In other words, ignore the specifics and take note of the trend. Much of China appears paralysed right now, but if the virus can be contained it will could be able to make up more ground than first expected.

About 99% of the cases of Wuhan virus have occurred in China and the daily increase in infections there has fallen below 10%. If this deceleration continues, it could mean the outbreak is approaching its peak. Investors will be watching this measure very closely over the coming days.

President Trump has thrown his support behind his Chinese counterpart’s handling of the recent epidemic. He took to Twitter to thank Mr Xi for his nation’s transparency and efforts to defeat the illness. China’s response has been miles better than the botch-job of SARS in 2003. Officially the Wuhan virus has infected and killed more people than SARS (although the mortality rate is much lower), but much of that is probably down to more information and better science.

It’s that old chestnut where you’re the victim of your own success: by being more transparent and having better tools for diagnosis and communication the problem looks worse than the dimly remembered and poorly reported past. Of course, this cuts both ways. It may be that SARS was less deadly than we think (or of similar viciousness to its Wuhan cousin) because the denominator is missing a whole load of people who had mild flu back in 2003 but never got themselves tested.

So well done, Mr Trump. Putting aside bitter differences to give China kudos for a much better response to disease control was the presidential thing to do. Sure, China’s strategy wasn’t perfect and it has got pretty authoritarian in places. But if you sandbag them for those imperfections you’re encouraging the nation to relapse to secrecy and bloopers when the next virus crops up.

We say when because it is only a matter of time. Bacteria and viruses have been trying to take us down for thousands of years and they will never stop evolving at lightning speed. We have only very recently managed to keep them at bay. The single biggest breakthrough, from the mid-1800s, is still the best prevention method according to the World Health Organisation: wash your hands.

UK 10-Year yield @ 0.57%
US 10-Year yield @ 1.58%
Germany 10-Year yield @ -0.39%
Italy 10-Year yield @ 0.95%
Spain 10-Year yield @ 0.29%


Economic data and companies reporting for week commencing 10 February

Monday 10 February

EU: Sentix Investor Confidence
Trading update: Lok’nStore

Tuesday 11 February

UK: BRC Sales (Like for Like), GDP (Q4), Construction Output, Industrial and Manufacturing Production, Index of Services, Private Consumption, Trade Balance, BoE’s Mark Carney Speaks at the House of Lords
US: MBA Mortgage Foreclosures and Delinquencies, JOLTS Job Openings, NFIB Small Business Optimism, Fed’s Jay Powell Speaks at Capitol Hill
EU: ECB’s Christine Lagarde Speaks at European Parliament

Full-year results: PJSC Polyus
Quarterly results: TUI

Wednesday 12 February

US: MBA Mortgage Applications, Fed’s Powell Speaks at Capitol Hill, Monthly Budget Statement
EU: Industrial Production

Full-year results: Novolipetsk Steel, Plus500, Primary Health
Half-year results: Dunelm

Thursday 13 February

US: CPI Inflation, Real Average Hourly Earnings
EU: European Commission Releases Winter Forecasts

Full-year results: Bank of Georgia, Barclays, Centrica, Churchill China, Coca-Cola HBC, Indivior, Relx 
Half-year results: Grit Real Estate Income Group, MJ Gleeson
Quarterly results: Safestore

Friday 14 February

US: Retail Sales, Import and Export Indices, Industrial Production, Capacity Utilization, University of Michigan Sentiment, Business Inventories
EU: GDP (Q4), Employment, Trade Balance,

Full-year results: AstraZeneca, Royal Bank of Scotland, Segro

Total votes: 102

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