Weekly View – Enter Borisnomics
The CIO Office's view of the week ahead.
There is a new sheriff in London Town and he is not shy with bold statements. So far as prime minister, Boris Johnson has not only pledged to take the UK out of the EU by 31 October – “no ifs or buts” – but has also signalled new tax cuts and spending plans, ranging from the police and the national public health service, to nationwide full-fibre broadband. While certainly popular issues, they also come with considerable price tags that government coffers grappling with tax cuts and the potential economic costs of a no-deal Brexit could struggle to cover. We are cautious on UK Gilts, lest a new era of fiscal stimulus transpires.
The EU has its hands full with weakening sentiment, as indicated by falling euro area PMIs, which again disappointed in July. Germany continues to lead the decline, particularly its manufacturing sector, which has been hit by falling exports and auto sales. In spite of this, the resilience of Germany’s domestic-orientated services sector endures… so far anyway. For its part, the ECB did everything short of cutting rates at its policy meeting last week. The stage has been set for a new round of quantitative easing as well as a September rate cut to support growth and inflation and avoid a recession. We favour a rotation to the quality cyclical sectors like industrials that would benefit from renewed easing.
This week, the US central bank is due its own policy meeting, when we anticipate it will confirm a 25 basis point (bp) rate cut. We will focus on how chairman Powell justifies the cut, especially as the US economy remains in good health, with record low employment and muted inflation. The downward pressure from a cut on the US dollar would be positive for EM currencies and with emerging central banks moving toward dovishness as well – Turkey’s cut by 425 bps and Russia’s by 25 bps last week – our preference for EM debt is consolidated further, with attractive spreads per turn of leverage.
César Pérez Ruiz, Head of Investments & CIO, Pictet Wealth Management