Weekly View - a spy in the White House?
House speaker Nancy Pelosi finally pulled the impeachment trigger last week. An inquiry will look into whether Trump misused his office to pressure Ukraine’s president to investigate potential presidential rival Joe Biden and his son. This is a risky move, given US presidential elections are around the corner and we do not know how impeachment proceedings will affect voter opinions. It is also unclear whether it would get past the Republican-majority Senate. At the margin, the likelihood of a US-China trade truce has gone up, given Trump lacks room for fiscal easing manoeuvre and will not want to risk a recession at home during his re-election campaign season. For this reason, we have moved to neutral from underweight in equities.
A deteriorating political landscape is spilling over into a weakening macroeconomic outlook, notably in Europe. Euro-area PMIs weakened further in August, with a contracting manufacturing sector starting to affect pockets of the services sector. Germany’s composite PMI (which includes both sectors) fell into contraction for the first time since 2012. At the same time, the crisis in the Commons that followed the reconvening of the UK Parliament last week has raised uncertainty around Brexit, but reduced the risk of a no-deal crash out on the 31st of October.
The IPOs of several start-up whizz kids have revealed that the markets are not willing to pay up for the unprofitable but highly valued companies formerly known as “unicorns”. This has served as a unicorn health check by public markets, which have challenged the rich valuations assigned by private markets to these innovative but loss-making companies. This stands in contrast to the 1999 run up to the dot-com bubble, when public markets rushed forward to buy up highly-valued internet companies in an overheated market environment, and gives us hope that markets today are behaving more rationally.