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Week in review: Brexit breakdown?

The Brexit saga has taken so many twists and turns since the 2016 referendum that one could be forgiven for tuning out entirely. Doubtless, many of us have. But this week’s developments were extraordinary enough to make anyone sit up.

On Tuesday, UK Prime Minister Theresa May’s government suffered the biggest defeat that any government has endured since the nineteenth century. The Withdrawal Bill, which set out Mrs. May’s deal with the European Union, was defeated by 432 votes to 230. But on Wednesday, the government comfortably defeated a “no-confidence” motion that would have resulted in a general election. The government’s deal can’t get through Parliament, but Parliament has just endorsed the government.

Back on the see-saw

So what does all this mean? The financial markets reacted in various ways, as well they might. In the currency markets, the British pound hit a two-month high against the euro. This occurred as investors decided that a softer Brexit or even a second referendum was now more likely. Cross-party talks on a compromise deal have begun, although the Labour Party leader, Jeremy Corbyn, has refused to take part unless Mrs. May rules out a no-deal departure.

The UK stock market fared less well, however. By Thursday’s market close, the FTSE 100 Index1 was down 1.2%. The pound’s renewed strength was a factor in this, as many FTSE 100 companies earn the bulk of their earnings abroad and thus benefit from a weaker pound. European shares performed better; the FTSE World Europe ex UK Index2 gained 0.5% for the week as of Thursday’s market close.

Notes from a (trade) war zone

Although most global markets performed well during the week, news from China caused both alarm and reassurance. On Wednesday, the People’s Bank of China injected US$83 billion into the domestic banking system. The measure is designed to encourage bank lending and thus boost a slowing economy. The official gross domestic product figures for the fourth quarter are due on Monday, January 21, and expectations are that they will have fallen to the lowest level since the global financial crisis of 2007-2008.

Trade data had already struck a worrying note. Chinese exports were reported to have decreased by 4.4% over the 2018 calendar year through December, and imports were down by 7.6%. Both figures were well below expectations. The trade war with the U.S. appears to be having a real impact. After this week’s stimulus announcement, expectations are that further measures will follow.

China’s domestic investors appear to be more excited by the prospect of stimulus than alarmed by the signs of a slowdown. The Shanghai–Shenzhen CSI 300 Index3 was up 0.5% for the week by Thursday’s close.

Shutdown shut out as investors back banks

In the U.S., meanwhile, there was no sign of an end to the federal government shutdown. President Donald Trump signed a bill to ensure that federal workers are compensated for lost wages—although this will not be implemented until the shutdown is resolved.

Investors in U.S. companies, however, were in an optimistic mood. Robust earnings reports from Goldman Sachs and Bank of America helped to send the S&P 500 Index4 to its highest level in a month, with a gain of 1.5% for the week through Thursday’s market close. Financials was, by far, the strongest-performing sector within the index over the week.

Although it lagged well behind financials, the technology sector showed some renewed signs of life. Shares of Netflix surged by 7% on Tuesday after the company announced that it would increase its subscription fees. A generally lackluster fourth-quarter 2018 earnings report took some of the shine off this, but the stock and the overall technology sector were still significantly higher for the week.

And finally...

Who says romance is dead?

It must have seemed that way, though, for Romeo, a Sehuenecas water frog who has been living alone in a Bolivian aquarium for the past 10 years. Poor Romeo was believed to be the last of his kind, and his species looked destined to die when he did.

But thanks to a discovery deep in Bolivia’s cloud forests, his less-than-splendid isolation is at an end. Intrepid herpetologists from Global Wildlife Conservation and the Alcide d’Orbigny Natural History Museum came across five Sehuenecas water frogs. One of these has been selected as a potential mate for Romeo and–inevitably –named “Juliet.”

But in contrast to Juliet’s ebullient personality, Romeo is, apparently, somewhat shy. Whether the forlorn frog will at long last become an amorous amphibian remains to be seen. We’re keeping our webbed fingers crossed…

1 The FTSE 100 Index is a market capitalization-weighted index of the 100 largest companies traded on the London Stock Exchange. Indexes are unmanaged and have been provided for comparison purposes only. No fees or expenses are reflected. You cannot invest directly in an index.
2 The FTSE World Europe (ex UK) Index tracks the performance of large- and mid-cap stocks in developed markets in Europe, excluding the UK.
3 The Shanghai–Shenzhen CSI 300 Index is a capitalization-weighted stock market index designed to replicate the performance of top 300 stocks traded in the Shanghai and Shenzhen stock exchanges.
4 The S&P 500 Index is an unmanaged index considered representative of the U.S. stock market.

Important Information

Companies mentioned for illustrative purposes only and should not be taken as a recommendation to buy or sell any security. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list.

Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.

ID: US-180119-80919-1