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Global Markets to 08 April 2019


Highlights

  • Global stock markets continue to rally on positive US job numbers and reduced concern over future US growth.
  • In Europe, reports that German industrial production has rebounded faster than expected help European bourses.
  • The UK requests a further delay to Brexit, while the President of the European Council suggests a “flextension” period of up to one year.
  • Core government bond yields continue to fall as global investors adopt a dovish outlook in response to slowing global growth.
  • Sterling falls on Brexit developments, which then helps to lift the FTSE 100 Index and global companies that benefit from a weaker pound.
  • While financial markets continue to rally, the focus is now on the corporate earnings season.


Global Market Summary

Financial markets continue to rally on the back of encouraging economic data from the US, as well as – surprisingly – Germany. However, the markets might be challenged over the next few weeks as superpowers America and China conclude their delicate trade talks and uncertainty over Brexit continues. Furthermore, the likelihood of the US and European corporate earnings session bringing disappointing news could add further negative downward pressure.

But last week’s reassuring US jobs report – non-farm payroll numbers have improved by 196,000 and wage growth has increased by 3.2% over the same month from a year ago – gave Wall Street a further boost, resulting in the S&P 500 Index being on track to win a seven-day winning streak.

This recent payroll report includes some excellent numbers: jobs growth with just the right amount of wage inflation – confirming that the economic backdrop of robust employment and meagre wage data is a perfect combination and that the US economy remains in fairly good shape

Admittedly, these are just two sets of numbers. We will need to pay more attention than usual to the factory and durable goods orders data, scheduled for publication this week. The market will need this data to remain robust if fears of an imminent recession are to be allayed (at least for now).

Perhaps more important for the market will be the start of the corporate earnings season (year-on-year numbers are likely to soften) and the traditional dismembering of future guidance statements by company analysts. This will doubtless generate both positive and negative reactions in the marketplace over the next few weeks.

The US financials will kick off proceedings next week and could lead to some early disappointments, particularly from the regional rather than the global banks, which may have fared rather better in this current investment environment.

The continuing trade negotiations between Washington and Beijing will also prove important. While the Chinese will want to do a deal, doing so may be difficult if President Trump is unwilling to negotiate – or roll back – on the tariffs already in place: he has indicated that he wants to maintain them as an enforcement mechanism. Unfortunately, this could make things very difficult for China and may prevent a deal from being struck.

In Europe, reports that German industrial production rebounded faster than expected in February have positively affected European bourses. But declining manufacturing orders, together with reports of new orders and export sales falling at a rate not seen since the global financial crisis have sparked real concern.

Germany’s economy is most definitely going through a challenging period, and a recession could be on the horizon. Nevertheless, the jobs market remains fairly healthy: the 3.1% unemployment rate is one of the lowest in the world. The Czech Republic, Iceland and Japan have lower figures.

Looking at the eurozone more widely, growth has slowed. But then Germany does account for 29% of the eurozone’s economic activity. It should also be remembered that Germany’s exports to China have been affected by the Chinese economic slowdown. And Brexit has had consequences for the eurozone.

Prime Minister Theresa May’s request for a further extension and the European Council’s offer of a “flextension” of up to 12 months have created tension between her parliamentary colleagues and European leaders.

In her letter to European Council President Donald Tusk, the Prime Minister said that the “impasse” over her Brexit deal in the Commons “cannot be allowed to continue”. She also drew their attention to the fact that she had begun talks with Labour leader Jeremy Corbyn with a view to finding an agreement and ensuring that the UK leaves the EU with an arrangement.

The Prime Minister has attracted criticism from some of her own MPs for seeking Labour’s help. In the meantime, Labour leader Jeremy Corbyn is “waiting to see the red lines move”, but has not yet noted any significant change in the government’s position.

While the two party leaders seem happy to negotiate a “joint plan” and a “programme of work”, the real issue of contention is that the Prime Minister has repeatedly ruled out the possibility of the UK remaining in a customs union with the EU – hence Corbyn’s frustration over the apparent lack of change in the government’s position.

Evidence would suggest that the talks are close to collapse. So unless some common ground is found, a further extension to Article 50 is likely, meaning that the government will need to start making “responsible preparations” for the European Parliamentary elections in late May.

This has led to further concerns over the final outcome of Brexit and the pound falling throughout the week. However, this gave a real boost to the FTSE 100 Index, given its concentration in global companies that benefit from weaker sterling.

In the core government bond markets, yields continued to fall as more cautious investors added to positions in response to the inversion of yields and a slowing global economy. Further rotational trades out of equities and into bonds could happen over the coming months if equity markets correct in response to any disappointing news flows.

To conclude, the markets are off to a good start in 2019; global investors are now embracing risk assets after central bankers set the scene for patient policy-making and there has been a reduction in perceived geopolitical risk – primarily the risk surrounding the US-China trade tensions.

However, in view of the slowing global economy, the likelihood of some short-term disappointments regarding corporate earnings and an as-yet-unknown conclusion to Brexit, the markets could still react negatively. Nevertheless, we would still prefer to invest in good quality global equities in preference to bonds – given their prospects for both longer-term capital growth and higher dividend yield.

The short-term path for risk assets, such as equities, might become a little more volatile over the coming weeks. But we would advocate buying on any weakness, given that the economic data and monetary policy backdrop still favour global equities over other asset classes.


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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