The Age Of Boris Begins

The US earnings season has been a little mixed across all sectors. Within technology, investors were disappointed by Netflix and Tesla but were delighted with positive surprises in the semiconductor sector.

The so called ‘Sox index’ rallied 3% on Wednesday and is back to all-time highs. It is important to follow the Sox closely as semiconductors are one of the most sensitive goods to an escalation in the Sino-US trade war. Caterpillar – the industrial bellwether – retained its full year profit guidance as weaker demand from US shale producers was mostly offset by stronger construction demand. Assuming earnings continue to come in line with analyst expectations, risk markets can remain elevated.

This will be helped by any improvement in the trade war. This week it was reported that top US officials, including Robert Lighthizer and Steve Mnuchin, will travel to China before the end of the month to reignite talks.

It will also be helped by the Federal Reserve delivering on investor expectations of a 25 basis point cut to interest rates next week, after the ECB yesterday hinted it will cut European interest rates in September. The Fed has been guiding investors to such an outcome and, undoubtedly, investors are positioned for this. Given that interest rate probabilities have been pricing in a 100% chance of a cut for the past few months, a ‘no-cut’ outcome would likely see bonds routed heavily.

This week saw Boris Johnson, a self-styled latter-day Churchill, ascend to the premiership. The margin of Boris’ victory increases the chance of a no-deal Brexit – although this outcome is still less likely than a positive outcome according to the betting markets.

Why? Well, a new leadership in Brussels combined with a new British government may be able to approach discussions from a fresh perspective. They could make enough changes to the Withdrawal Agreement to see it rebranded as the “Brexiters’ Bill” and passed through the Commons, with support from hard Brexitiers – like Jacob Rees-Mogg who is part of the government now – and MPS who wish to avoid a no-deal Brexit at all cost. Famously, Churchill swapped parties not once but twice. In the same vein as his hero, Boris’ ability to flip-flop on his rhetoric and play down prior promises indicates he may be flexible on his ‘with or without a deal’ promise.

Finally, it is worth noting that the US department of Justice announced a broad antitrust investigation into leading online platforms – another sign that a ‘big tech will meet big regulation’ narrative is progressing.

© 2019 GWM