One Country, Two Systems
This week, while Tory party hopefuls all clamour for the chance to sit in the captain’s chair on the Titanic, another democracy is also on the brink of collapse. Protests in Hong Kong over changes to the Island’s governance structure saw thousands hit the streets, despite a violent clampdown from Chinese authorities. The “one country, two systems” arrangement, that has allowed a form of democracy to exist in Hong Kong since the British handed control back to the Chinese in 1997, looks to have come to an end. While China has been undermining this system for years, new rules allowing Honkongers to be arrested and extradited by mainland Chinese police has finally killed off its quasi-independence.
Elsewhere markets are on alert after two oil tankers came under attack in the Gulf of Oman. Unconfirmed reports suggest Iran is stepping up its confrontation with the Arab states and is focusing on compromising their oil exporting infrastructure. The cold war between Iran and Saudi Arabia and its allies looks to be heating up with a possible dramatic effect on global oil supplies.
UK: South Korea Agrees Post-Brexit Deal with UK
The UK moved towards improving global trade relations by agreeing to sign a freetrade deal with South Korea. The in-principle agreement aims to maintain stability after the UK leaves the EU in the event of a no-deal Brexit. Both countries will formally sign the deal by October 31 and implement it in November. This means that businesses will be able to carry on trading on preferential terms with South Korea for at least two years. However, the agreement is not a permanent trade deal, rather a continuity deal to avoid entering a regulatory void after October 31.
According to the UN Comtrade, South Korea represented 1.7% of UK’s total export pool, and UK imports from South Korea represented a mere 0.8% of all UK imports in 2017. The EU is the UK’s largest trading partner, representing 44% of UK’s total export pool and UK imports from the EU represented 53% of all UK imports in 2017. While the news is positive, a sound trade deal between the UK and EU would be better touted as a proper victory.
US: United Technologies and Raytheon to Merge
United Technologies and Raytheon agreed to an all-share merger, which would create a new aerospace and defence giant, making it the second-largest defence contractor by revenue. The deal is expected to close in the first half of 2020, after United Technologies completes the previously announced spin-off of its Otis Elevator and Carrier building-systems businesses. The deal will provide both companies with scale and diversification across commercial aerospace and defence and could help to counter any slowdown. The deal is yet to be approved by Department of Justice or the Federal Trade Commission.
Activist investor Bill Ackman who has a 0.7% stake in United Technologies through his hedge fund, Pershing Square, has come out against the merger. He referred to Raytheon as “a large business of inferior quality” and said he “cannot comprehend the strategic logic behind such a transaction.” US President Donald Trump also weighed his opinion behind the merger and suggested the deal could result in less competition in the sector, potentially increasing costs for the US military.
Oil: Markets unnerved by attacks in the strait of Hormuz
Two oil tankers were severely damaged by attacks in the Strait of Hormuz. The ships, a Japanese and a Norwegian vessel, were hit by unknown weapons and abandoned by their crews in the Gulf of Oman, one of the world’s busiest shipping routes. Those attacks coincided with the visit of Japanese PM Abe in Iran. Both US and Iran places the responsibility of these incidents on each other.
Oil traders do not appear to be betting on a serious or prolonged disruption emerging. Although oil prices jumped up by 4.5 per cent immediately after the second attack, they fell back and remained below the level they traded at in mid-April, when they reached $75 a barrel. Oil traders are paying more attention to the rising supplies of crude from the US shale industry as well as a slowing global economy which could leave the market in surplus this year.
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