ALEX BRUMMER: The Trump rally turns sour with geopolitical factors taking over

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Alex Brummer says


The gravity-defying run on global share markets is hitting the buffers. There is no shortage of reasons for feeling nervous. Rising US interest rates might have started the rout, but geopolitical factors are taking over.

President Trump’s trade war has unsettled the Chinese economy with output slipping and equity markets tumbling.

The murder of Washington Post columnist Jamal Khashoggi has cast a cloud over the tinder box of the Middle East with Turkish strongman Recep Erdogan’s heavy criticism of Saudi Arabia.

Alex Brummer says 'President Trump's trade war has unsettled the Chinese economy with output slipping and equity markets tumbling'

Alex Brummer says ‘President Trump’s trade war has unsettled the Chinese economy with output slipping and equity markets tumbling’

The White House did nothing to calm jitters with the president suddenly abrogating the intermediate-range missile treaty with Russia, leading to fears of a new nuclear arms race.

One might have thought that Brussels has more than enough on its hands with Brexit. But the EU finds itself at odds with Italy, the eurozone’s third largest economy. The budget dispute sent the yield on the Italian ten-year bond up to 3.74 per cent, the highest level since 2014.

As if this were not savage enough, some disappointing earnings reports from big American industrials 3M and Caterpillar gave rise to concern that the Trump surge, the result of cuts in corporation tax, could be fizzling. 

In London the FTSE 100, which has badly lagged during the bull market, slipped feebly by 1.2 per cent and stands at its lowest level since March.

Disappointing earnings reports from big American industrials 3M and Caterpillar gave rise to concern that the Trump surge, the result of cuts in corporation tax, could be fizzling

Disappointing earnings reports from big American industrials 3M and Caterpillar gave rise to concern that the Trump surge, the result of cuts in corporation tax, could be fizzling

Disappointing earnings reports from big American industrials 3M and Caterpillar gave rise to concern that the Trump surge, the result of cuts in corporation tax, could be fizzling

On Wall Street the brutal October sell-off is gathering strength. Equity markets are fickle and it is possible that healthy earnings from Twitter, Google owner Alphabet and Amazon, which report today, could temporarily turn the tide.

The bitter truth is that upswings in shares do not go on forever and boom and bust has not been eliminated. There is more than enough geo-political uncertainty, much of it originating in Washington, to scare the horses and lead investors to search for safety.

Antonio’s dreams

Anyone who has experienced Lloyds Banking Group’s private banking can only rejoice that restless chief executive Antonio Horta Osorio has decided to get into bed with Schroders. The blue-blooded house has consistently been an outperformer in an industry plagued by heavy outflows.

As an asset manager, Schroders is one of the handful of survivors of the great days of British investment banking. Horta Osorio has made no secret of his desire to extend the bank’s reach into wealth management, as if he has suddenly rediscovered the wheel.

Brummer says: 'Anyone who has experienced Lloyds Banking Group's private banking can only rejoice that restless chief executive Antonio Horta Osorio (pictured) has decided to get into bed with Schroders'

Brummer says: 'Anyone who has experienced Lloyds Banking Group's private banking can only rejoice that restless chief executive Antonio Horta Osorio (pictured) has decided to get into bed with Schroders'

Brummer says: ‘Anyone who has experienced Lloyds Banking Group’s private banking can only rejoice that restless chief executive Antonio Horta Osorio (pictured) has decided to get into bed with Schroders’

Lloyds has been down this path before when the late, great Sir Brian Pitman sought to do much the same with Scottish Widows. If all goes to plan some £80 billion of Scottish Widows, Lloyds insurance and some £400 million of wealth management will be transferred into the new joint venture.

The goal is to develop an open banking platform which will give affluent Lloyds customers the slick services offered by Hargreaves Lansdown among others. There is a stronger case for Lloyds to stick to its knitting by providing better utility banking. Savers at Lloyds earn the most pitiful rates of interest on the market. Admittedly, it is far from worst in class when it comes to overdrafts charges, but it has some distance to travel if it is ever to offer comparable good value to First Direct.

But the biggest objection to Lloyds’ grandiose ambition is that as a result of the HBOS merger it has market shares in mortgages, current accounts and deposits to die for. Leveraging that heft into asset and wealth management could be anti-competitive.

Nor is it clear that customers with access to the Lloyds-Schroders joint venture will really get more choice. Past experience is that the first port of call for banks when selling investment products is own label. Schroders’ experience looks to be an upgrade on Standard Life-Aberdeen, but it is just one suite of products. Retail banks have attempted similar adventures in the past. However, bureaucratic culture inevitably leads to disappointment.

Film noir

Netflix’s £1.6 billion high yield junk bond issue reflects the ambition of the producer of House Of Cards and The Crown to blow up the cable and Hollywood model. But as fixed interest investor Kames Capital notes, appetite for the bond depends on investors being willing to fund negative cash-flow because of the Netflix model of offering cut price content at a loss.

If growth rates were to plateau or tumble, or bond yields were to soar, then it could all go horribly wrong. Don’t switch off. 



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