Political events have always had an impact on the world’s financial markets but rarely have they mattered quite so much as they do now.
Take two current examples. The latest news from Germany on Thursday was dire, with a plunge in factory orders adding to the risk of a technical recession – two successive quarters of negative growth. Normally, this would be a reason to sell German shares but the Frankfurt stock market was up.
Why? Because trade tensions between the US and China appear to have eased. Hopes of a deal when top-level talks resume in Washington next month boosted share prices on most bourses. Germany, an export-dependent economy, has more than most to gain from a trade truce.
The London stock exchange was one market not to join in the party. That’s because the leading index of shares – the FTSE 100 – is dominated by companies that do most of their business overseas and whose sterling earnings rise as the pound goes down.
Sterling is currently on the rise, not because there has been any good economic news but because investors think the government’s defeats in a series of parliamentary votes has reduced the chances of a no-deal Brexit. There was even a spike in the pound’s value when Jo Johnson, the prime minister’s brother, announced he was quitting. Sterling has become a barometer of Brexit.
That’s not to say nothing else matters. Share prices are being supported by the belief that the US Federal Reserve and the European Central Bank are going to cut interest rates this month.
But tweets from the White House and the numbers going through the division lobbies at Westminster currently matter more. And that should be a reason for caution because Donald Trump is likely to take a tough line with China until the 2020 presidential election in November next year and Britain is heading for a general election, the outcome of which is impossible to predict. The sensitivity of financial markets to political events means they will remain volatile.
IMF faces uncomfortable questions over Argentina
Christine Lagarde looks to have got out of the International Monetary Fund just in time because an almighty storm is about to break over the financial assistance provided by the Washington-based organisation to troubled Argentina.
The problems with the $57bn (£46bn) loan to shore up South America’s second biggest economy are manifold. For a start, under its own rules the fund is not supposed to lend to countries with unsustainable debts unless a restructuring happens first. It broke that rule in Argentina’s case.
As is usual, Argentina had to abide by strict conditions in order to qualify for IMF assistance. When these terms were not met, the IMF eased the conditions and lent more money to the government of president Mauricio Macri.
The point of an IMF loan is to put struggling economies back on track. In Argentina’s case, much of it went to hedge funds that had previously lent recklessly to the country. Macri was a president the IMF liked the look of: a fiscal conservative and an inflation hawk. But he has not delivered. Inflation is rampant; the economy is contracting and foreign debt is soaring. The size of the loan and the speed with which it has been disbursed raises the suspicion that the IMF is doing its best to keep its man in Buenos Aires in place.
But Macri’s grip on power is loosening and in an attempt to stave off defeat in next month’s presidential election he has raised public sector salaries and cut taxes on consumption. Under the terms of the agreement with the IMF, Macri is supposed to be reducing Argentina’s budget deficit not increasing it.
What does all this mean? It means Argentina is heading for a political crisis, an economic crisis and a debt crisis. It means that Argentina is heading for a default when it ought to have had its debt restructured. It means that the Fund has failed to learn from its mistakes. And it means that Lagarde’s successor – Kristalina Georgieva – will have questions to answer.
WeWork float downgrade reflects limited business model
Well, who would have thought it? Reports from the US suggest that the office rental company WeWork will have a price tag of $20bn rather than the $47bn previously mooted when it is floated on Wall Street.
Potential investors have gleaned that WeWork is not an Uber or an Amazon with a disruptive business model. It is a real estate company that has lost the thick end of $3bn in the past three years.