Politics once again dominated the direction of financial markets this week. It began with news that Donald Trump’s administration had successfully renegotiated Canada’s involvement in the North American Free Trade Agreement, with Canada agreeing to a number of concessions, in return for avoiding onerous tariffs on its vehicle exports to the US. White House officials are now of the view that the renegotiated agreement hands Trump more power in his battle with China. In combination with US tariffs against China, which increases the cost of production there, foreign businesses will start moving investment out of China, the administration calculates. This would weaken China’s ability to produce next-generation technology, putting pressure on Beijing to make the trade concession being sought by Trump.
International Monetary Fund (IMF) Director Christine Lagarde reduced expectations for the global macroeconomic outlook, saying international growth may have plateaued. The IMF’s official economic forecasts, which will be released next week, have ‘become less bright’, and that factors identified as merely risks earlier in the year have begun to materialise.
The European Commission has raised concerns over the budget plans of Italy’s anti-establishment Government, sending Italian Government Bond Yields higher, as the proposed populist Government giveaway continues. Italy is expected to run a budget deficit of 2.4% of gross domestic product next year and the deficit is set to remain elevated for a number of years. The actual percentage could be a lot higher if growth disappoints. Italy plans to distribute preloaded shopping cards to those receiving the “citizens’ wage”. This proposed anti-poverty initiative will give up to €780 each year to Italy’s poorest citizens.
Greek banks experienced their biggest drop in a year on Wednesday, and have lost around 30% of their value since early September, due to growing concerns about their need for capital. Traders attributed the drop to the deterioration in the European bond market resulting from political tensions between Italy and the European Union (EU).
Closer to home, the Conservative Party Conference and the Brexit debate dominated the headlines. As expected, former foreign secretary Boris Johnson attracted great interest and support with his “chuck Chequers” speech, whilst Prime Minister “dancing queen” Theresa May relaunched her Brexit strategy, referred to a “Chequers 2.0”. This involves aligning external goods tariffs with the EU, and agreeing to comply with the EU’s trade policy for many years until a superior technological solution to the Irish border is found. It also appears that Britain will accept that goods destined for Northern Ireland from Britain will meet EU standards. Finally, it is likely that the UK will strengthen its commitment to the single market’s level playing field, extending it to cover more goods and more of the inputs affecting manufacturing costs. The Prime Minister’s proposal to effectively relinquish further ground to the EU’s demands, irritated many who already opposed her Brexit plan. The risks of a “no-deal” outcome or indeed a second referendum are growing.