Review of the week: Mexican stand off
The week starts with a temporary reprieve in the Mexican stand-off, but will it last? Chief investment officer Julian Chillingworth looks at the prevailing winds in US trade rhetoric, the hot air here at home and the anti-trust threat heating up for America’s tech giants.
President Trump’s latest threats were defused in the nick of time. Late on Friday night, Mexico and the US came to an agreement over migration and the threatened imminent introduction of tariffs was alleviated. Mexico may be breathing a sigh of relief today, but that’s unlikely to be their final dealings with the US President. Same goes for the markets.
Unfortunately, agreement between China and the US remains elusive. President Trump said he believed China wanted a deal with the US and he would reappraise the tariff situation after the G20 meeting at the end of June. This was undoubtedly a mandate for Steve Mnuchin to reopen up talks with his Chinese counterparts ahead of that. The current thinking is the most likely outcome of such a meeting would be a truce, as opposed to an abandonment of tariffs by the US, and the restarting of talks.
Positive vibes continued in the markets, despite some mixed US data over the past week. It culminated in much weaker than expected US employment data, but that was just seen as confirmation that the US Federal Reserve would deliver the hoped for tonic in the form of a rate cut. Just 75,000 new jobs were added rather than the 180k consensus estimate – nothing a bit of rate-cutting can’t fix? Not all data has been weak, though. For example, the ISM index of activity in the services sector (representing the bulk of US economic activity) came in ahead of expectations, at 56.9.
Hot air everywhere
As his caricature in blimp form was deflated and he boarded Air Force One to return to the US, Donald Trump wasn’t the only bone of political contention we bid farewell to last week. Our Prime Minister Theresa May stepped down from the frontline but will remain caretaker until her replacement takes over in July. And who wants that job? Almost a dozen MPs have thrown their hats in the ring, but the bookies’ favourite is Boris Johnson, with his ‘deal or no deal’ stance.
If Johnson wins, the EU is likely to refuse his central objective of removing the backstop. The Commons could then begin the process of legislating to force him to seek another extension to Article 50, and Johnson could then call a general election to seek a mandate for his approach. Article 50 would have to be extended again to allow time for the election, possibly till the end of the year. A no-deal scenario is looking more possible.
Source: FE Analytics, data sterling total return to 7 June
Tech under fire
Tech was hit hard by the news that US authorities are launching a twin initiative led by anti-Trust Officials at the Justice Department and the Federal Trade Commission to look into uncompetitive practice at Alphabet, Apple, Facebook and Amazon. Those close to the situation suggest that Alphabet and Facebook are the two companies in the regulator’s crosshairs to start with.
Looking back in history dominant players in the US in the telecom and oil sector have come under extreme regulatory pressure, leading to the breakup of their businesses. However, remember that Standard Oil was dismembered at the turn of the 20th century. The sum of the parts turned out to be worth more, didn’t dent the Rockefeller’s wealth and out of the break up came Exxon. Still, the exercise took many years of court proceedings.
There’s a tipping point where a luxurious new gadget or service becomes so ubiquitous that it becomes a de facto right. There was a time — not so long ago — when indoor plumbing or electricity were beyond the reach of many Americans and Britons. Now it’s unthinkable to let a home or office be without them. Perhaps it’s enlightening to think that you should now add internet access to that list of required amenities. Usually, at this point regulation tends to be a good way to deliver this technology that society has deemed a right of all to those who would usually miss out under a private monopoly.
Governments on both sides of the Atlantic (in fact, around the world) are spending trillions of dollars to extend internet access to virtually all their citizens. Something that was an esoteric luxury just a few decades ago, is now considered the equal of running water. You could argue that gives them a greater interest in how these networks are used and who profits from them.
The exact point where “fairness” says ownership of a technology passes from private hands to the public is unclear. But a safe guess is that it happens when most people in the world depend on something as a daily necessity. If at that point the private purveyor is price-gouging, abusing its position or simply unwilling to finish the proliferation of its service to all parts of society, then it seems highly likely that lawmakers will take action. You can read more on the topic in a series called “The great tech break-up” that we published last year in InvestmentInsights.
UK 10-Year yield @ 0.85%
US 10-Year yield @ 2.14%
Germany 10-Year yield @ -0.23%
Italy 10-Year yield @ 2.43%
Spain 10-Year yield @ 0.58%
Economic data and companies reporting for week commencing 10 June
Monday 10 June
China: May trade balance
Tuesday 11 June
UK: May labor market report
US: May NFIB survey, PPI
EU: French business sentiment
Halma quarterly earnings
Oxford Instruments quarterly earnings
Crest Nicholson Holdings quarterly earnings
Wednesday 12 June
US: May CPI inflation
Norcros quarterly earnings
Thursday 13 June
EU: Eurozone April industrial production
Consort Medical preliminary results
Syncona quarterly earnings
DS Smith quarterly earnings
Friday 14 June
US May retail sales, industrial production; June preliminary University of Michigan consumer sentiment