The impact of political tensions on business is ever more apparent: LVMH of France will not, after all, proceed with the purchase of Tiffany of the US. If, as seems likely, the hand of the French government was involved, this is solid evidence that political sensitivities are increasingly influencing cross-border deals – something that is likely to remain the case just as M&A in general has been declining.
Volatility is on the rise across most assets, particularly equities (although we are still some way off March levels). Sovereigns are not so vulnerable due to massive central bank intervention – some might say manipulation. With government bonds under control, we are increasingly seeing market views expressed through FX markets. Nowhere has this been more apparent than in the reaction to the UK government’s unilateral reneging of key provisions of the EU Withdrawal Agreement, which was followed by a predictable plunge in the value of sterling. EU observers are as confused as they are angered by the UK government’s action, whose motives are difficult to discern. Is this just another tactic in trade negotiations or are the British really comfortable with the prospect of no deal? We are concerned by the rising prospect that no trade deal is agreed or that we have a DINO (deal in name only). Against this background, the Bank of England could bring forward the monetary easing it has previously been signalling, possibly as early as this week.
Last week’s ECB meeting could at best be described as low-key. Christine Lagarde was surprisingly upbeat considering weak growth numbers and disinflation. In her statement, she expressed support for coordination of fiscal and monetary policy, but there was nothing to suggest early easing. We believe that the meeting was in some ways a missed opportunity, but we still expect more stimulus by the end of the year. We need also to watch the euro closely. The single currency has paused against the USD of late but could find a second wind if investors gain confidence in euro decision making.
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