Global Markets to 10 February 2020
- While the coronavirus continues to make the headlines, the world’s financial markets – with the exception of China’s – seem to have emerged unscathed.
- Hopes that the central banks will remain sympathetic and implement further monetary actions, China’s announcement of a reduction in US tariffs and President Trump avoiding being removed from office all help to stimulate positive sentiment for equity markets.
- In the UK, Prime Minister Johnson and EU chief negotiator Michel Barnier begin formulating their negotiating positions ahead of next month’s trade talks.
- A trade war might break out between Washington and Europe over the next few months. Given President Trump’s anger over Boris Johnson’s decision to allow Huawei limited involvement in the UK’s 5G network, the UK could get caught up in such a trade war.
- In the commodity markets, OPEC reacts to the recent collapse in the oil price by proposing production cuts. Other OPEC members are likely to respond over the coming days.
- While the global equity markets have been fairly resilient since the beginning of 2020, net cash outflows have been reported in favour of safe-haven assets, such as cash.
Global Market Summary
While the coronavirus continues to make the headlines, the world’s financial markets – with the exception of China’s – seem to have emerged unscathed. The fallout will most likely make itself felt more fully over the coming months. The rising number of official cases and the fatalities already caused by the virus will inevitably mean a cost to the global economy.
There are growing concerns about the spread of the virus and the Chinese authorities have imposed travel restrictions on about 40 million people living in and around Wuhan in an effort to contain the outbreak. However, many cases have now been confirmed in countries and regions outside China.
The travel and leisure industry has been severely hit: certain cruise lines are banning passengers and crew with Chinese passports from all of their ships, while thousands of passengers on various luxury cruise liners docked in ports around the Asian peninsula are now confined to their cabins and under 14-day quarantine.
Although leading biotechnology companies are working tirelessly on developing a vaccine and other treatments, disruption to demand around the world will be significant, perhaps even more so for China and its economy. Historical data shows that the nine-month SARS (Severe Acute Respiratory Syndrome) outbreak of 2002-2003 caused China’s GDP growth to contract by around one to two percentage points.
By comparison, the current coronavirus epidemic is only a few weeks old, but there have already been more fatalities and the effects are more wide-ranging. So much so that the People’s Bank of China has injected more than £50 billion into the country’s banking system to support liquidity. Beijing has also announced that China will cut tariffs on some US goods to 5% from 10%, while some levies on other goods will be reduced from 5% to 2.5%.
If the outbreak continues indefinitely, then the levels of disruption might lead to other policy easing announcements from other trade partners – such as partners in the rest of Asia, the Pacific rim and even as far as Europe: the global recovery in manufacturing had only just started and is now in danger of being derailed by the virus.
In the US, President Trump escaped removal from office – as expected – and has since focused his ire on his critics and those who initiated the impeachment enquiry against him. Meanwhile, the Democrats are still suffering the humiliation caused by the technical difficulties which plagued Monday’s Iowa caucus, resulting in confusion over the results and questions over their accuracy.
Closer to home, Prime Minister Boris Johnson and EU chief negotiator Michel Barnier have set out their negotiating positions ahead of next month’s trade talks. Mr Johnson’s recent refusal to consider close alignment with the EU on rules over social protection and the environment and his rejection of the European courts’ jurisdiction have sparked talks of a hard Brexit.
Mr Barnier, on the other hand, has indicated that Brussels would only offer a highly ambitious trade deal with zero tariffs on goods if the UK aligned with EU standards. This stalemate with the EU comes at a time when President Trump has been described as “incensed” by Mr Johnson’s decision to allow Huawei a limited role in the UK’s 5G mobile phone network.
Given the friction being created between the US and Europe, some market watchers believe that Washington might focus its trade policies on the EU and possibly the UK. Already, EU Trade Commissioner Phil Hogan has been to Washington twice in less than a month to try and improve the transatlantic partnership.
In the commodity markets, the price of crude oil has suffered in recent weeks as concerns mount over the collapse in petroleum demand from China. Now that oil prices have tumbled into bear-market territory, OPEC has been swift to react by proposing cuts in oil production; we now await the reactions from leading oil producers such as Russia.
As far as the current economic backdrop is concerned, the US seems to be coping well with recent events: it added a further 225,000 new jobs last month, and Wall Street remains resilient – particularly the technology sector, which has seen growth of 7% since the start of the year. Similarly, the UK economy seems to be faring relatively well: employment, retail sales and house prises are all on the rise.
Needless to say, attention will now be focused on UK Chancellor Sajid Javid’s budget next month: it has been suggested that he might levy taxes on high earners and introduce a shake-up of pension tax breaks. Rumour also has it that he wants to make the tax system fairer and more efficient by introducing a raft of reforms… reforms that could hit the better-off while easing the burden on strained public finances.
Although generally speaking, the western stock markets are holding up relatively well – Wall Street in particular –, the same cannot be said for those of developing countries: the coronavirus is taking its toll. Short-term concerns over the virus and a number of other black-swan issues are likely to create an uncertain investment backdrop. Indeed, some analytical data has already indicated that private investors in the UK and US have retreated into the safety of cash out of fear that something sinister is about to happen after such a long period of expansion.
A short-term cautious approach in times of uncertainty is definitely wise. But being overly cautious or even panicking can be far more costly to the global investor – particularly when many of the fundamentals remain fairly positive.
The coronavirus is obviously likely to affect global GDP growth over the coming weeks or even months. But we remain fairly optimistic and believe that this negative event will eventually produce a positive outcome. Further central bank intervention and government initiatives are likely to lead to some green shoots of economic optimism. Any meaningful pull-backs in the stock markets should therefore be viewed as buying opportunities.
It is always important to focus on the longer-term outcomes – history has proved time and again that the best investment returns are delivered over longer timeframes. Which leads me nicely to one of Warren Buffett’s famous maxims: “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.”
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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