Last quarter’s commentary was dominated by Brexit and the broken high street. Well, I’m afraid to say, both also feature quite heavily in the first quarter of 2019!
Europe
Brexit date extended (again)
You’re probably sick of hearing about Brexit, but the past few months have been frankly astonishing. In January, Theresa May warned the UK faced ‘uncharted territory’ if Parliament rejected her withdrawal deal. The deal was defeated by 230 votes in January and 149 votes in March, meaning we’re now in that ‘uncharted territory’.
In the hope that a compromise can still be reached, May and EU leaders agreed an eleventh-hour ‘flextension’ until 31 October. However, the UK is still no nearer to leaving the EU and this uncertainty means markets continue to be volatile, just as they ended 2018.
UK
UK economy remains weak as automotive sector struggles
In terms of UK labour productivity, figures from the ONS show a modest increase from the previous quarter. GDP grew by 0.2% in the three months to January 2019 but remains weak. The ONS blamed the poor performance on a decline in metal goods manufacturing, construction and the automotive industry.
The automotive industry has been particularly impacted by Brexit; potentially ruinous for several local economies. Jaguar Land Rover and Ford confirmed a combined 4,900 job losses, while Nissan announced that they will not produce their X-Trail model in the UK as previously planned.
More retail job losses as high street continues to face challenges
High street woes continue as retail giants Maplin and Toys R Us closed their doors for good, resulting in the loss of 4,500 jobs.
Sports Direct tycoon Mike Ashley has been making a few headlines, but is he the saviour of the high street? Ashley’s portfolio already includes several sportswear brands, lingerie business Agent Provocateur, fashion retailer Flannels and significant shareholdings in French Connection and Debenhams.
In late 2018, House of Fraser and Evans Cycles joined the empire in £90 million and £8 million takeovers respectively. As a major shareholder, Ashley was also circling the struggling Debenhams. However, after his bailout bid was rejected the department store group fell into administration, wiping out Ashley’s investment. The company announced plans to close 22 of its 50 UK stores as part of a restructure, putting 1,200 jobs at risk.
King of the department stores, John Lewis and Partners also felt the pinch. Profits were down 45% and more than 83,000 staff were told their bonus would be at its lowest level since 1953.
US
US government shutdown finally ends
In America, the government finally reopened after a 36-day shutdown; the longest in history. The shutdown is estimated to have cost their economy $11 billion due to lost output and delayed spending.
Brought about by President Trump’s desire for Congress to fund his proposed border wall, the President has since declared a national emergency in an attempt to secure funding for his project. There have been threats to close the US/Mexico border entirely amid a migration surge, with the potential disruption threatening trade worth billions of dollars.
Overall, US markets have steadily grown in Q1. This has been predominantly thanks to the Fed confirming in January it would adjust planned interest rate hikes to compensate for slow economic growth after the shutdown. Throughout the first three months of the year, the Fed settled further into a dovish stance, as growth was slower than predicted.
By the end of March, US equities’ progress had dropped to a far more cautious pace as investors balanced the Fed’s accommodative tone with the broader implications for economic growth. As the quarter ended, the Fed lowered its projections for US growth and inflation, and reduced its expectations for interest rate hikes.
The “dot plot” now shows no rate hikes this year and only one in 2020. The adjusted growth outlook caused the Treasury yield curve to invert – a signal historically associated with a pre-recessionary environment.
Boeing faces huge bill as it grounds its 737 Max aircraft
Then, in March, Ethiopian Airlines flight 302 became the second Boeing 737 Max to crash in just five months. A total of 346 people lost their lives in the two accidents, widely suspected to be caused by a new, malfunctioning, anti-stall mechanism.
After multiple governments grounded the jets, the Federal Aviation Authority ordered the US aerospace giant to suspend all 371 of the aircraft whilst investigations into the two crashes took place.
With hundreds of 737 Max aircraft grounded worldwide and thousands of orders now on ice – with some of those possibly in jeopardy – the commercial impact of this episode is still evolving. Airlines with grounded craft are likely to demand financial compensation from Boeing, with the potential bill set to rise significantly if the situation continues into the peak summer months.
As it frantically works on a software fix, Boeing’s share price has remained remarkably steady – although who knows what future repercussions there may be?
Asia
Tensions with China soften despite Huawei controversy
Tensions in the ongoing US/China trade saga softened in the new year. This was partly thanks to Trump agreeing to delay the imposition of the latest round of tariffs following a series of seemingly productive meetings, positively impacting markets and the wider global economy.
Relationships with the world’s third largest phone and tech supplier Huawei have also been causing controversy. Firstly, the founder’s daughter and company deputy chair Meng Wanzhou was arrested in Canada and faces extradition to the US.
Then, the tech giant hit the headlines as the US, Australia and New Zealand governments blocked Huawei from providing the technology for their 5G networks, citing security concerns. The fallout continued in the UK with the sacking of defence secretary Gavin Williamson for allegedly leaking details of the government’s plans to allow Huawei to supply ‘non-core’ 5G mobile equipment in the UK.
The firm’s founder, Ren Zhengfei, is a former People’s Liberation Army officer so has close Chinese government links. The apparent risk to national security comes from China’s National Intelligence Law, which was passed in 2017. It states that organisations must “support, cooperate with and collaborate in national intelligence work.”
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