The Multi-Asset Process

August 2018 Market Review

August tends to be among the quieter months of the calendar, with much of the country – including our trusty politicians – usually away for a decent part of it. As ever these days however, there was plenty to report around the world, at least on the political front.

We finally saw a long-awaited interest rate rise from the Bank of England right at the start of August, removing governor Mark Carney’s ‘unreliable boyfriend’ tag for now. With so much focus on the rise that never was back in May, the significance of this actual hike perhaps went under the radar a little. After all, it was only the second rise in a decade and takes the level back to the highest since March 2009.

As we have said over recent months, this shows we are now firmly – albeit slowly – back on the road towards the so-called old normal in terms of monetary policy.

Elsewhere, after months of writing about Brexit and America’s president dominating headlines, it makes a change to highlight a new face on political volatility street this month in the shape of Turkey. We have covered this situation elsewhere in recent days, suffice it to say that Turkey’s troubles have undoubtedly soured sentiment on emerging markets as a whole and we see this as yet another example of noise trumping fundamentals.

Weaker global growth, combined with higher interest rates and a strengthening US dollar, have laid bare vulnerabilities in countries reliant on external borrowing, such as Turkey and Argentina, but plenty of other emerging markets continue on the path towards sustainable long-term growth.

Of course, it is impossible to write any commentary without talking about the adventures of the current inhabitant of 1600 Pennsylvania Avenue. And beyond his usual attacks on the press, the increasingly antagonistic relationship with the Federal Reserve is garnering attention and has taken some of the recent shine off the dollar.

For me, reports of Trump taking control of the Fed are exaggerating the actions of someone who seems incapable of communication without conflict, but it is clearly something to keep an eye on. Commentators in the US have drawn comparisons to Nixon’s pressuring of Fed chairman Arthur Burns to keep rates low back in 1970s: in that case, Burns complied and paved the way for the runaway inflation that forced a rapid series of rate increases by Fed Chairman Paul Volcker in the 1980s.

Elsewhere, Trump remains the central figure in the ongoing trade war situation, with further tweets over the course of the month suggesting $200bn of new tariffs on Chinese goods not helping the selloff in emerging markets. US markets, which had largely ignored EM weakness, dropped on the back on renewed fears of a blow-up with Asia’s powerhouse.

Since Trump took office, his approach to negotiation often seems to be throwing a grenade into the room and then offering to help clear up post explosion. Sometimes however, it is useful to look through the noise surrounding every one of his proclamations to see what lies beneath. On trade for example, rising protectionism is clearly in no one’s best interest but many of the current agreements have been in place for decades, signed when the world was a very different place in the midst of the cold war.

Some revision would therefore seem sensible but as ever with Trump, it is hard to ascertain whether the policy actually comes from that thinking or he is simply beating the MAGA drum.

On the Brexit side, another month drifts by towards our scheduled exit in March without the much-needed clarity on many issues.

I continue to believe Theresa May’s Chequers plan – written with input from a number of business leaders – is a sensible solution that recognises trade agreements take time to build and cannot be spun out of thin air overnight. This would see the UK agreeing a "common rulebook" with the EU for trading in goods, in an attempt to maintain friction-less trade at the border.

That obviously sparked resignations and renewed in-fighting but with the spectre of a no deal lurking in the background, I increasingly see the prime minister presenting the country with a binary choice – either accept her proposals or risk the consequences.

As has been the case for the last two years, most of us can do little but wait and see.

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Monday, September 10, 2018, 2:24 PM