In the Supreme Court last Tuesday, the 11 judges of the UK’s highest judicial body unanimously ruled Boris Johnson’s prorogation of parliament unlawful. Back in the Commons on Wednesday evening, debate between MPs was bitter and emotional as the Brexit saga reached an altogether different level.
Amidst the drama of the week, an unlikely star of the show emerged. The spider brooch worn by Lady Hale, President of the Supreme Court, caught the eyes of many looking for answers to the Brexit conundrum. Was she suggesting the prime minister is trapped in a web of his own creation?
Sterling wobbled in response to events, down for the week on Friday lunchtime. “The decision raised the political temperature to boiling point but did not meaningfully alter the chances associated with various paths for Brexit,” said David Riley of BlueBay Asset Management. “The aftermath, however, has revealed the depth of the Brexit faultline in British politics – and that does not bode well for sterling assets over the longer term.”
With the path forward remaining unclear, businesses continue to feel the impact. A study from the Federation for Small Businesses showed that only one in five companies is ready for the UK’s exit in a month’s time. Meanwhile, Thomas Cook went into administration, Jaguar Land Rover announced the temporary closure of production plants, and Sainsbury’s confirmed the closure of 100 stores and 70 Argos branches. However, James de Uphaugh of Majedie was encouraged by the move.
“Sainsbury’s sees cost-cutting potential of £500 million over the next five years, which should allow price reductions to be funded internally with no negative impact to profitability, but with significant potential for margin expansion,” said de Uphaugh. “The contrast to Aldi is notable. With its margins at all-time lows, Aldi will struggle to respond to further price cuts.”
Friday’s fall in the pound came after the Bank of England forecast future interest rate cuts, which it would introduce to mitigate the economic impact of Brexit uncertainty, even if no-deal is avoided. However, it is hardly alone; major central banks worldwide have turned increasingly dovish in recent months. Yet divisions over easing at the European Central Bank were laid bare when the group’s most senior German official resigned in opposition to the bank’s planned bond purchases.
Data released on Thursday showed that eurozone business lending has increased 4.3% since August last year, while consumer confidence in both Germany and the UK was marginally better than expected. However, with France pledging $10bn of tax cuts in its 2020 budget, and the automotive industry showing further signs of decline, the eurozone remains in the woods, particularly following Trump’s threat to impose $8 billion of tariffs on the EU after a spat with Airbus.
The US president was caught in a web of his own on Tuesday, as Democrats opened an impeachment inquiry following revelations that Trump had pressured the Ukrainian prime minister to investigate a rival US presidential candidate. The announcement saw the S&P 500 fall more than it has in a month. It continued to wax and wane throughout the week, slipping on Thursday night as investors mulled over the impeachment’s potential impact on the economic outlook and 2020 election.
News of the inquiry cast a long shadow over global markets generally, which had started the week positively following reports that the US and Japan were close to reaching a trade deal, but went on to reverse gains by the time markets closed on Thursday.
Consumer confidence fell in the US in September amid trade fears, while the country’s trade in goods deficit rose $400 million over the course of the month. Economists raised concern about the sharp decline in IPOs, which have fallen 25% in the last year alone, reflecting worries over the trade war and a possible economic slowdown.
Amid concerns about the impact of tariffs, Nike was the exception to the rule. Quarterly results published on Tuesday were better than expected, and shares hit an all-time high as a result. They attributed the 7% rise in sales to one country – China.
Asian markets had a bumpy week. Stocks across China showed signs of strain, as the Hong Kong index hit a three-year low on Wednesday and China’s CSI 300 dropped before recovering slightly on Friday. On Thursday, the US levied further tariffs against the country for its alleged shipping of Iranian oil. While production in Saudi Arabia has recovered to more than eight million barrels a day, helping to push prices back down to $62 a barrel, the vulnerability of the kingdom was highlighted following the deployment of two hundred US troops and air missile systems to the region.
While China tries to manage the effects of the ongoing trade war on its stagnating economy, Asia’s emerging economies are profiting. Data released last week showed that exports from developing countries – notably Vietnam and Bangladesh – to the US had risen by 10% compared to this time last year. With the state of US-China negotiations changing weekly, Asia’s emerging economies are wasting no time seizing market share and reshaping global supply chains.
New figures from HMRC show that the number of estates paying Inheritance Tax (IHT) has reached a record level. Over 28,000 estates paid IHT in the 2016/17 tax year (the latest data available), with an average bill of £179,000. Total receipts of £5.4 billion in 2018/19 were also a record high.
The nil-rate band has been frozen at £325,000 since 2009/10. Since then, both the number of estates paying IHT, and the amount levied by HMRC, have doubled as property values and share prices have surged. It’s estimated that the tax-free threshold would now be £432,000 had it risen in line with inflation.1
The figures have led to renewed calls for the nil-rate band to be increased, but also for a more fundamental review of the tax to make it simpler to navigate. Opposition parties have proposed alternative measures to tax lifetime gifts differently. But families can only plan based on the current rules, and IHT remains a concern not just for the very wealthy.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.
1Wilsons Solicitors, September 2019
In The Picture
As the temperature in Parliament rises, Azad Zangana, Senior European Economist and Strategist at Schroders, gives his view on the likely impact of a no-deal Brexit on the economy.
The Last Word
The law must have the last word.
Jacques Chirac, former French president who died last Thursday
BlueBay is a fund manager for St. James’s Place.
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