A slowing world awaits direction
Global investors are awaiting policy decisions to help provide them with direction. John Redwood rounds up the issues.
In Germany, the Green party is polling at more than 20% of the vote. Meanwhile, Angela Merkel’s party struggles to stay much ahead of them whilst her SPD government partners languish in the low teens. The government is less stable now the SPD have changed leaders, as many in the party either want a more left-wing government agenda or a break -up of the coalition.
The new President of the European Commission, Ursula von der Leyen, wants a big and bold green policy to reflect the mood in the European Parliament. That requires more money for the EU budget. She now finds Germany is leading a small group of countries that make substantial net contributions to the EU which want a smaller budget over the next seven years of the financial settlement compared to the Commission. There is likely to be tough bargaining to get to an agreement. The eastern countries want bigger transfers where the Commission is offering a Just Transition fund – and France will seek to defend the agriculture subsidies.
Oil and China uncertainty
This week, OPEC met in Vienna. Saudi Arabia wants a further cut in output to boost the oil price as it sells some shares in Aramco, its oil production company. There are doubts about how reliable some of the OPEC members will be if new output cuts are agreed, as many of the OPEC members and countries allied to OPEC led by Russia need the revenues from pumping more oil. Many still think the US, as the newly-emerged leading oil producer of the world, will be able to expand production further, keeping prices down.
China is wrestling with a series of internal problems, whilst trying to conduct difficult negotiations with Donald Trump over trade. The need to rein in bad debts and keep money under control has helped to slow the economy more than normal. There have been several corporate bond defaults, including most recently the failure of Founders Group to meet a payment on its offshore bonds, despite having a domestic AAA rating. It turns out that being owned indirectly by the Chinese state is no guarantee that bills will be paid. China’s domestic credit rating agencies are now subject to a bit of competition from foreign rating agencies. Their system generates positive ratings, with 97% said to be AA or better. The emerging default rate shows this is optimistic.
Markets seem to move most on rumours of better or worse news on a possible US/China mini deal on trade. The underlying trend of US equities has remained upwards, now buoyed by interest rate cuts and more liquidity provided by the central bank. Chinese markets have been weak as we expected owing to the domestic slowdown, the trade war and the problem in Hong Kong. European markets have made decent progress this year despite the sharp slowdown in growth and the political uncertainties generated by the European Parliament election and the appointment of a new Commission.
EU Green Deal
We are awaiting news of the big EU Green Deal which will be the much-advertised central new policy direction. It is, however, struggling a bit against a background where the surplus countries that make net contributions to the EU are very reluctant to see fiscal expansion at EU level, as well as remaining cautious with their domestic budgets. The ECB says it has done all it can with monetary laxity. (John Redwood looks at green central banking here.)
We are still some way off the fiscal stimulus in the Euro-area that many think it needs to grow faster. There may be scope to impose new green taxes to pay for some of the Commission’s wish list of green projects. Serious consideration is being given to a tax on plastic waste that cannot be recycled. Some want to divert money from the EU carbon trading scheme to the EU itself at a time when it is expected that scheme may be toughened.
In the run-up to the new year markets would welcome more clarity on future trade relations, on the extent of fiscal expansion in the EU if at all, and on the pace of change in the complex Chinese debt markets.
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John Redwood is Chief Global Strategist at Charles Stanley & Co. Limited, which is authorised and regulated by the Financial Conduct Authority.