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Global Markets to 03 December 2018


Highlights

  • Stock markets react after Federal Reserve Chairman Jerome Powell and Vice-Chairman Richard Clarida signal a change in the central banks’ stance regarding future monetary tightening.
  • The price of US crude oil plunges 22% in November, recording its weakest month in over 10 years.
  • US President Donald Trump and his Chinese counterpart Xi Jinping agree to suspend new trade tariffs for 90 days to allow for further talks.
  • The backdrop behind global stock markets becomes more deflationary as the mood for monetary tightening and global trade tensions alter course.

Petronella West, our CEO will be publishing our ‘5 Top Tips for Brexit and Your Finances’. Watch out for this in the next couple of days.

Global Market Summary

This week, stock markets and investors focused on three important events: the speech delivered by the Federal Reserve Bank Chairman Jerome Powell, the G20 summit in Argentina and the continuing fall in the price of crude oil. These three factors are likely to provide some important clues as to the future timing and direction of US monetary tightening, the rapport between Presidents Trump and Jinping and the effects of lower oil prices on both the global economy and domestic oil exporters and importers.

As far as the US central bank is concerned, its language has shifted slightly. Federal Chairman Jerome Powell is now choosing his words more carefully, saying that US interest rates were now “just below” the level needed to control inflation and regulate the economy for the future.

Interestingly, this statement comes after Federal Reserve Vice-Chairman Richard Clarida suggested that the central bank should adopt a “gradual” approach to rate hikes and should be “data dependant”. Both these comments are somewhat different from recent statements which indicated that they were nowhere near the top of this current monetary tightening programme.

The Federal Reserve Bank has been managing market expectations by indicating that there would be a further rate hike in December, followed by three more next year. But these recent proclamations would suggest that while a December hike is still likely, there are now fewer increases on the cards next year – perhaps even just one. As one would expect, global equity markets have been readjusting themselves in anticipation of far higher US interest rates and the probability of an even stronger US dollar. As a result, interest rates might not rise and the dollar may remain at current levels.

Given these slightly hostile conditions, global investors have been lightening up on their exposure to risk assets – such as equities – in favour of short-dated US government bonds and raising the cash positions. Subsequently, emerging markets, Asia and China have reacted the most, falling by as much as 25% from the recent highs. However, this now means that if US monetary tightening is coming to an end and the US dollar starts to weaken, many of these market corrections are overdone, offering global investors an interesting buying opportunity.

The trade war between the United States and China is the other major issue that has been plaguing markets for most of this year. Ongoing announcements of tit-for-tat tariffs have created uncertainty and animosity between the two leading global nations.

These tariffs have also had ramifications for the rest of the world’s trading partners – the economies of countries such as Germany have recently been hit. Good news came at this week’s G20 summit in Buenos Aires, however: President Trump and Xi Jinping have agreed to suspend new trade tariffs for 90 days so as to afford them time for further talks.

This was the first face-to-face meeting between the world’s two most powerful leaders since the start of the trade war earlier this year. The summit also saw the G20 leaders agreeing to a joint declaration that acknowledges divisions over trade, but without criticising protectionism.

The next 90 days will obviously be extremely important, the number one question being “can the US and China resolve their trade war”. If the answer is no, the equity markets might not respond favourably to further tariff announcements. In the meantime, however, the markets are likely to view this as good news and react positively.

While the financial and economic backdrop has been all about monetary tightening and trade war tensions, the third most important issue this year has been the aggressive fall in the two global oil benchmarks – North Sea Brent and US light crude. Both these oil benchmarks saw a price fall of more than 20% in November, making it their worst month in 10 years. This correction can mainly be attributed to global supply outstripping demand, although it was widely expected that OPEC and Russia would agree to some form of production cuts.

The winners and losers are obviously countries which export and import oil, with there being implications for inflation if oil prices remain at these low levels for longer. Given the implications that this could have for global economic data and domestic growth, this data will be closely monitored by the central banks.

As we draw closer to the end of 2018, we are considering what 2019 might hold in store for us. We believe that both the economic and investment focus will remain on the US. Financial conditions remain favourable in US, and the softening of the Fed’s tone towards monetary tightening should be positive for US equities. Furthermore, the risk of recession remains low in the US – which is good news. So if Presidents Trump and Xi Jinping can reach a trade agreement, some stress is likely to disappear from the financial markets.

The emerging markets and Asia also stand to benefit from this positive news – given the torrid time that they have had this year. China could also constitute good hunting ground for bargains if the US and China are able to reach an agreement on tariffs. There is little likelihood of any rate increases in Europe… only the withdrawal of quantitative easing. And in Japan, the continued implementation of Abenomics could lead to further investment returns.

The markets are currently vulnerable to any positive news: since October’s “flash crash”, investors have become overly pessimistic. While there will probably be a relief rally soon, followed by a final pull-back, the bull market should return in some form in 2019.

Finally, as far as the UK and Brexit are concerned, we are publishing a separate article detailing our thoughts and suggestions. Overall, however, it must be stressed that in times such as these, it is important to hold your nerve, keep to your financial plan and look upon this market correction as a long-term buying opportunity. Now is not the time to be throwing the baby out with the bathwater.

Peter Lowman, Investment Quorum, Investment, The Lowdown

Peter Lowman is the Chief Investment Officer at Investment Quorum, a Director of the company and an integral member of our investment committee.

This article does not constitute specific advice and investors should bear in mind that capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority.

If you would like to hear more about our wealth management services then please do not hesitate to call us on 0207 337 1390 or contact us via email. We would love to hear from you.

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