Powell joins the Navy in coming to the rescue

In 1805, Commodore Farquhar, captain of the HMS Acheron, successfully defended a convoy of 32 merchant ships from assault by the French navy, losing his own ship in the process. On his return to Britain, his actions were hailed by Admiral Nelson and he was given a ceremonial sword by Lloyds of London – which is on sale for a rather princely £150,000.

This week, Her Majesty’s Navy were called upon once more to defend a British merchant vessel, this time from Iranian forces as Iran tried to impede the vessel in a tit-for-tat retaliation over the impounding of one of their own ships headed for Syria.

These actions occurred as French diplomats battled to save the Iran Nuclear Accord after Iran said it would breach uranium enrichment levels set under the agreement. So, it is fair to say the past week has seen tensions in the Middle East ratchet up a notch.

After some solid employment data last Friday and better than expected inflation data this week, a very dovish Jerome Powell, the chairman of the Federal Reserve, all but guaranteed a cut to interest rates later this month during his testimony to Congress. Indeed, one well known market commentator quipped that bond investors could sue the Fed for breach of contract if it did not cut rates! However, the past week has seen small hopes of a larger cut dissipate. All in all, this has left equity markets little changed on week and bond yields only a little higher.

Whilst Powell’s testimony was the big market event over the past five days, there are five things that are worth noting:

1) It was reported that Trump told president Xi the US would cool its rhetoric on the Hong Kong protests to help restart trade negotiations.

2) Senator Rubio (Republican) wrote a letter to the MSCI, which is responsible for managing the indices a lot of passive money tracks. This letter questioned why the MSCI decided to increasing its exposure to domestic Chinese companies. This is potentially the start of a skirmish on the fringe of the Trade War.

3) “A low but rising risk” of US currency market intervention – these words from Goldman Sachs align with the view we have held for the past couple of weeks. Trump may prefer to wage a currency war than a tariff war as this is politically cheaper for him, and also weakens the dollar, which is what he wants.

4) Trump has directed Robert Lighthizer – US Trade Representative – to launch a Section 301 investigation into France’s digital services tax, which could result in tariffs on French goods. Today’s newspapers reported that the UK is pressing ahead with proposals for a similar digital tax.

5) As European bond yields continue to fall, Greek government bond yields fell to the same levels as US Treasuries this week. This means investors are willing to accept the same returns on money lent to Greece, which has a ‘B’ credit rating, as money lent to the US, which has an AAA rating.

With that in mind a sensible investment strategy may be to remain underweight fixed income, overweight alternatives, market weight in equities and no exposure to antique naval swords!

© 2019 GWM