The pound whipsawed in trading down on Tuesday at one point falling below 1.19 briefly. Later in the day rallied back above 1.2 to the US dollar as the Conservative party lost its government majority and Parliament looked to prevent a “no-deal” outcome. Boris Johnson has threatened to call a General Election however this requires a two-thirds majority, so he yet may be thwarted. The Conservatives are polling ahead of the Labour and Boris Johnson may feel this is the only way to receive the mandate he requires to negotiate an alternative deal with Europe. Parliament is also looking to delay Brexit till January 2020.
It does seem hard to fathom precisely what Parliament does want at this time. They rejected a deal three times, which was could be described as a soft Brexit. The consequence appears to have led to the path that is now being taken to try and renegotiate a new deal. They look to reject that as well.
Global equities started September in a sombre mood as the latest manufacturing data from the US showed a decline for the first time in three years. China filed a complaint against the US with the World Trade Organisation as the threatened US tariffs came to force. One does not have to look far to find data to feed the bears. The latest UK manufacturing data reported a weaker than expected number suggesting UK manufacturing is in recession. The US small business confidence index has fallen to a seven-year low. Corporate profits are falling as a percentage of GDP.
So, on the face of it, equity markets should be on the back foot again. However, the world’s central banks remain committed to preventing a global economic recession. The bond market continues to paint a pretty gloomy picture. Next week the ECB is expected to announce a series of measures to reinvigorate their economy. The Fed likewise may cut further. The gloomier the bond market becomes, the more relatively attractive other assets become. It’s a strange world we live in.