Global Markets to 09 September 2019
- Global equities begin to recoup some of the losses they suffered in August.
- The global economy continues to endure the effects of the trade war, but some commentators believe that the central banks will come to its rescue with further aggressive monetary stimulus.
- Investor confidence is tested by trade tariffs, Brexit and political upheaval on a daily basis.
- In the UK, the Prime Minister and his tactics for delivering Brexit continue to take centre stage.
- In the commodities markets, gold remains popular as investors look for hard assets as an alternative to equities and bonds.
- September is usually the worst month of the year for stock markets. But perhaps this year, central bank policy will create a positive backdrop for risk assets, such as equities.
Global Market Summary
August was a volatile month for financial assets: the Dow Jones Industrial Index recorded its fourth biggest drop of all time, while global economic slowdown fears took hold and trade war tensions increased. Official data published for the month showed that growth in China had deteriorated to its weakest levels in 17 years, while in Europe, fears of a recession in Germany became more acute.
In view of this somewhat gloomy economic outlook, the US decided to delay further tariffs on certain Chinese goods, while completely removing some items from the tariff list. The news then broke that Washington and Beijing were to resume their trade talks at some point over the coming months. This was obviously warmly welcomed by the markets, which immediately underwent a V-shaped recovery in risk assets – such as equities, which clawed back most of that record mid-August Wall Street fall. In fact, the S&P 500 Index is now very close to the intraday record high that it reached on 26 July 2019.
The real uncertainty facing investors remains the daily noise on the markets made up of trade talks, Brexit, central bank policy and Trump’s regular tweets that can create unnecessary negative trading. The same can be seen on the bond and commodity markets: bond yields are constantly falling and the price of gold rallying.
Similarly, the economic data is not quite as sound as it could be: there has been disappointing US payroll growth (year-on-year), it looks as though corporate earnings growth will subside over the coming months and the yield curve has recently inverted, which historically suggests that a recession is in the offing.
However, it is difficult to sell the equity market ahead of the Federal Reserve Bank’s next policy move – particularly in light of the recent weakening of the US economy, since in all likelihood, there will be further interest rate cuts over the coming months. And with trade talks scheduled to resume between the US and China in October, the markets should react favourably to any positive outcomes.
Nonetheless, the global economy continues to suffer the effects of the ongoing trade war and the increased risks associated with an imminent recession. That’s why cautious investors have continued to rush for safe-haven assets, such as government bonds. Currently, a third of the world’s tradable bonds have negative yields and this is likely to rise over the coming months – unless there are some positive outcomes to the trade talks.
Another important factor is that ageing populations have increased demand for bonds, thus helping to push yields into negative territory. Similarly, gold prices have recently been surging as investors have started looking for “hard assets”, believing that lower interest rates and inflation are here to stay.
The forthcoming trade talks will play a major role in determining the direction of the markets. Here in the UK, the risks associated with Brexit have increased. Prime Minister Johnson has made it clear that he is prepared to leave the European Union without a deal and that he is ready to fly in the face of democratic and parliamentary convention in order to reach a compromise withdrawal agreement before the October deadline.
He is playing a high-risk game and his tactics are being called into question by both politicians and the general public. The four-to-five week suspension of Parliament ahead of the government’s new policy agenda (to be presented in the Queen’s speech in mid-October) was met by widespread disapproval, with some commentators condemning it as an antidemocratic and politically unconstitutional move. Failure to win the House around and the resignation of important government ministers – including Amber Rudd and even his brother Jo Johnson – have put the Prime Minister under significant pressure.
Given his failure (thus far) to win support for an early general election, his options are now very limited. Renegotiating the withdrawal agreement with the removal of the Irish backstop now seems his only way forward, with both sides making compromises. After all, a hard Brexit would have devastating short-term effects for everyone.
If there were a last-minute Brexit deal, then sterling would most likely recover and increase in value in relation to both the US dollar and the euro. It would also boost investors’ risk appetite for mid- and small caps, as well as leading to improved forecasts for growth in the country’s GDP. We might also see long-term UK gilt yields reverse and recover from their recent declines.
As far as sterling is concerned, although it recently dipped below the US$1.20 level, it did not overreact to the news of Parliament being suspended. Nor indeed was it overly troubled by the suggestion of an early general election: everyone who wants to rid themselves of sterling has clearly already done so.
The summer months saw Brexit turn into an exercise in tactics: emotions have been running high, and both Parliament and public opinion continue to be divided. With weak political leadership in the UK and a steadfast European Union, no real progress has been made in finding a solution. Only when both parties decide to sit down and hash out a deal will confidence return. Hopefully, common sense will prevail over the coming weeks.
Historically, September has been a challenging month for stock markets, and with uncertainties continuing in relation to the trade talks and Brexit, some problematic trading days almost certainly lie ahead. But central bank policy is likely to create a positive backdrop for risk assets, regardless of global events and current valuations.
As Alan Greenspan, ex-chairman of the Fed said recently, “the stock market generates a wealth effect that grows the economy”, adding that “every 10 percent rise in the S&P 500 generates a 1 percent improvement in the nation’s gross domestic product”. Conversely, a serious correction would have the opposite effect. Therefore, given that we have a US president who will not want to create a negative backdrop for either corporate America or personal wealth, and in view of the Federal of Bank’s current dovish monetary policy, the markets are likely to move higher between now and the end of the year.
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.
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