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Global Markets to 4 November 2019

 

Highlights

  • Global equity markets rise on better-than-expected global economic data and further central bank loosening.
  • In the US, October’s non-farm payroll numbers surpass consensus forecasts and are better than the previous month.
  • For the third time this year, the US Federal Reserve Bank cuts its policy rate by 0.25 basis points.  But in so doing, it signals that it has finished its policy easing for now.
  • The latest Chinese manufacturing data shows that activity has grown at its fastest pace for two and a half years.
  • In the UK, MPs vote for a December general election, temporarily ending the Brexit paralysis.
  • October has delivered a positive return: the MSCI World Index rose by 2.5%.

Global Market Summary

Although financial history records October as the worst month for financial crashes, this is not necessarily always the case. Overall, October tends to deliver a positive return for financial markets and this year has been no exception: the MSCI World Index rose by 2.5% over the month.

Summer, on the other hand, was challenging for the financial markets: the US-China trade talks, Brexit and an overall slowing-down of the global economy all catalysed fears.

This uncertainty led to a rotation out of the more growth-orientated stocks into the more favoured value-based stocks as a defensive manoeuvre against a potential market correction. But this was short-lived: positive news about the trade negotiations came, the likelihood of a no-deal Brexit diminished and additional central bank intervention was thought to be imminent.

The past couple of weeks have brought with them a measure of clarity and confirmation. The US-China trade negotiations have taken a step in the right direction with the so-called “phase one” deal near completion. And as far as Brexit is concerned, the vote to hold a general election on 12 December 2019 has temporarily suspended the Brexit saga until after Christmas.

Similarly, the Federal Reserve Bank has reacted to the slowing US and global economies by cutting its policy rate by a further 0.25 basis points. This is the third time this year that it has reacted to softer economic data in such a way.

But as investors, we need to consider a number of caveats before getting caught up in the irrational exuberance of daily stock market and media hype. First of all, President Trump’s trade battle with China is an important factor, since it will determine how Wall Street closes out for the rest of the year.

However, President Trump’s “impulsive nature” has caused Chinese President Xi Jingping to question the possibility of a long-term trade deal with the US, while the former takes every opportunity to express his resentment to the Chinese administration over its alleged theft of American intellectual technology property.

But the US President is entering an election year, and he will need to steady the ship and keep the US economy on a healthy path towards economic growth – particularly now that the supportive tailwinds for lower rates and tax cuts are likely to weaken.

And then there is the growing impeachment case against him. He is, however, unlikely to quit voluntarily, believing that the Republican-controlled Senate will save him.

Secondly, although Westminster has agreed to hold a general election in December, Brexit uncertainty still continues. It is hard to believe that more than three years after the referendum, the future of our relationship with the European Union – our largest trading partners – is still undecided.

Now that the European Union has granted the UK a third extension until 31 January 2020, we now await the outcome of the general election and the various ways in which the new parliamentary arithmetic might affect the direction of Brexit.

In all likelihood, the beginning of 2020 should bring some clarity to the nature of the future relationship between the UK and the EU, together with an end to the paralysis at Westminster. The UK and the EU will then be able to start healing the political differences that this lengthy and difficult period has created.

Thirdly, the sustained imposition of tit-for-tat trade tariffs between US and China has affected regions throughout the world all through 2019. And this will continue unless both parties strike a comprehensive and definitive trade deal.

However, last week’s October US non-farm payroll numbers surpassed consensus forecasts by a healthy margin, supporting the Federal Reserve Bank’s earlier decision to pause any further interest rate cuts following its third 0.25 basis point cut this year.

Further optimism surged through the financial markets on the announcement that China’s Caixin survey showed that October had seen its manufacturing data rise at its fastest pace in two and half years

The strength of these reports – together with the earlier news that US GDP data for the third quarter was slightly stronger than forecast – bodes well for the global economy. It even indicates that the downward adjustment in growth might already be behind us and that we are moving back into a period of higher growth.

The addiction to cheap money continues to stimulate market sentiment – the US President is constantly calling for lower interest rates and regularly tweets to the Fed to share his thoughts on the matter. But low interest rates damage lenders’ profitability and encourage savers to take additional market risk in a bid to capture higher returns – because of the abysmal returns that can be achieved from cash deposits.

So, after a few difficult summer months, the financial markets seem to have resumed their upwards momentum – buoyed by a possible short-term US-China trade deal, a friendly Fed chair and the postponement of Brexit until 2020.

All of this is likely to further boost the financial markets as the end of the year draws near. Nevertheless, recent comments from Chinese officials casting doubt over the possible long-term resolution of the current trade situation, the implications of President Trump being impeached and ongoing Brexit uncertainties are likely to continue to haunt the markets into the early months of 2020.


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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