Review of the week: Schism
The Conservative Party has politicked itself into a terrible bind, explains Julian Chillingworth, our chief investment officer. The consequences for the country could be momentous
Prime Minister Theresa May capitulated last week and entered negotiations with Labour leader Jeremy Corbyn. If the two can come to terms, it will almost definitely be to implement a softer form of Brexit, probably a customs union. But that’s if they can come to terms. Both parties are unhappy with the pow-wow, so as many will be working against a cross-party deal as for it. That must have been a pretty difficult decision for Mrs May to make: to admit that she, as a life-long Conservative, has more chance of compromise by talking with the party she has opposed for decades than the one she has lived her life by.
This all seems emblematic of the deep rifts that have cracked open within the UK’s main political parties. Today, it’s the Conservatives. In the past, almost always, it was the Labour Party. Whether it was the split when liberal leftists left to form the SDP in the 1980s or when Tony Blair led a centrist surge that sidelined the dyed-in-the-wool leftists in the 1990s. Or when the dyed-in-the-wool leftists counterattacked a few years ago, pushing out another cadre of moderates to form an independent party.
It’s probably pretty structural: people with progressive politics, who are chasing change, tend to squabble about which future they should be fighting for. Conservatives have an in-built advantage: when you believe things are best just as they are, it tends to be easier for everyone to get onside with the message. And so it goes, the world over. Left-wing political parties, generally, fragment easily while conservatives tend to be better at swinging together when it counts to hold the line. But what happens when you suddenly have two possible pasts for conservatives to hark after?
Charles Gave, a macroeconomic consultant, believes the Conservative Party is at a dangerous point, skewered by intractable disagreements between its two wings. If the UK is pushed out of the EU at the weekend by a veto from one of the EU-28, it will be the end of Mrs May, but it would lead to a UK election fought along traditional Conservative/Labour lines. If Mrs May succeeds with a cross-party deal, Mr Gave thinks it will likely spell the end of the Conservative Party as we know it. The party is likely to be torn apart by betrayed leavers (both MPs and voters) on one side and the ‘Davos men’ on the other. It would give a new and invigorated platform for arch-Brexiteer Nigel Farage as the head of the Brexit Party (UKIP’s successor) to reconnect with the spurned masses. If Mrs May does revoke Article 50 or delay Brexit beyond the EU elections, Mr Farage’s anti-EU candidates will probably gain enough votes to effectively ratify the referendum result and refute the government’s fudge.
Pretty chilling thoughts for a Monday, but this split in the Conservative Party is something I’ve been mulling for some time. And how it plays out will have huge consequences for British politics for a generation or more.
Meanwhile, time is ticking away. Without a plan or an act of kindness, the UK will crash out of the EU on Friday without a deal. Mrs May is adamant that she doesn’t want the UK to be within the bloc by the time the European polls open on 23 May. You can understand this on many levels. There’s the futility of voting simply to walk away months or even a year later and the cost of the hustings both in pounds sterling and in political capital. You can already dream up the headlines that would greet such a situation. It seems like a good gamble to say Mrs May will not be in No.10 if the UK heads to the polls next month. But that’s ages away. Whatever will pop out of this week?
Source: FE Analytics, data sterling total return to 5 April; *to 4 April
A new cold war
Investors have been through the mill over the past few months. Starting in abject sadness about the state of the world and economic growth, stock markets were in the dog box at the beginning of the year. But since then they have rocketed higher, delivering the best start to the year in almost a decade.
Optimism about three specific concerns have helped bolster equities: the US Federal Reserve (Fed) put the brakes on interest rate hikes, Chinese growth appears to be rebounding and US President Donald Trump has been making happy signals about the US-China trade deal. All this added up to a 10% jump in the MSCI World Index (GBP) of developed market equities, a truly remarkable move.
In the dying months of 2018, markets were diving and many investors were diving for cover. The Fed took notice of the panic and swiftly gave notice that it was done hiking interest rates for the foreseeable future (not that long ago it was planning at least two in 2019). And all the trillions of bonds left over from quantitative easing the Fed was going to sell off? Well, that will be abandoned in about six months too – years earlier than expected. Relieved investors fell over themselves to buy back stocks. That accelerated when Chinese data ticked upward. We have been cautiously confident throughout the turbulent last six months. When markets were crashing we felt it was an overreaction; now markets are overly jubilant we are more sceptical of prices and are counselling caution.
While the chances of a recession have risen, we believe it will be many months – probably almost a year and a half away, possibly longer – before a downturn arrives. Economic data are mostly solid, particularly in the US and China. A truce in the Sino-American trade war would likely add another leg up for markets, too.
If tweets by President Trump are anything to go on, the US and China are close to striking a deal over trade. That would put an end to investor worries about global trade flows, but, in our opinion, it wouldn’t be the end of the issue. This fight has many, many years left in it yet.
While Mr Trump’s presidency has come to be inexorably linked with tit-for-tat tariffs and protectionist rhetoric, beef with China is not confined to the White House. Suspicion of Chinese technology and its nefarious potential uses is rife across the Potomac River at the Pentagon as well. And American businessmen have been grumbling about ‘unfair playing fields’ in China for decades; many of them have the ear of congressmen and senators on both sides of the aisle, too. Make no mistake, this issue will stick around for years, regardless of who’s in charge in 2020 – or 2024 for that matter.
That’s because this isn’t just about trade, but about national security in the digital age. Our societies depend on intricate and fragile systems for everything from keeping the lights on and trains running to meeting friends, buying the groceries and watching television. All it takes is a chip the size of a grain of sand in the wrong chipboard or a line of code hidden in software to wreak mayhem on a modern economy. This is the new cold war, to be fought in boardrooms and data centres the world over.
UK 10-Year yield @ 1.12%
US 10-Year yield @ 2.50%
Germany 10-Year yield @ 0.00%
Italy 10-Year yield @ 2.48%
Spain 10-Year yield @ 1.10%
Economic data and companies reporting for week commencing 8 April
Monday 8 April
US: Factory Orders, Durable Goods Orders
EU: Sentix Investor Confidence; GER: Trade Balance
Final results: Keywords Studios, Northbridge Industrial Services
Tuesday 9 April
US: NFIB Small Business Optimism, JOLTS Job Openings
Final results: The City Pub Group, Luceco
Wednesday 10 April
UK: GDP, Trade Balance, Industrial Production, Manufacturing Production, Construction Output, Index of Services, RICS House Price Balance
US: MBA Mortgage Applications, CPI, Real Average Hourly Earnings, FOMC Meeting Minutes (March), Monthly Budget Statement
Final results: Tesco, Walker Greenbank
Interim results: ASOS, McCarthy & Stone
Trading update: Pagegroup
Thursday 11 April
EU: GER: CPI
Interim results: WH Smith
Trading update: Man Group
Friday 12 April
US: Import Price Index, Export Index, University of Michigan Sentiment Survey
EU: Industrial Production; GER: Wholesale Price Index