Global Markets to 11 November 2019
- Trade-talk sentiment between China and the US continues to drive global equity markets and fluctuations against a backdrop of conflicting statements.
- The world’s leading central banks turn on their liquidity taps as concerns multiply over growth and corporate profitability.
- The UK General Election campaign gets underway with Conservatives taking early lead; however, the electoral landscape can quickly change.
- Last week global investors scrambled out of bonds and back into equities, sending both bond yields and equities higher.
- In the FX market the US dollar remained robust whilst sterling’s stability rests on outcome of December’s General Election.
- Global bond and equity markets have performed well in 2019 despite the activity slowdown and decreases in company profitability.
Global Market Summary
Global equity markets continue to be driven by trade talk sentiment from Washington and Beijing. Positive and negative statements released by officials from both camps have led to market fluctuations.
The US President claimed that China’s supply chain was like a “broken egg”, but trade talks continued apace. Both sides reported an initial “phase one” tariff rollback agreement between China and the US. This idea was, however, met by opposition within the Trump administration, with Trump denying that he had agreed to anything.
Nevertheless, trade talks with China, according to Trump, were moving along “very nicely”, reiterating that the US want a “great deal”, and if it’s not a great deal, he won’t make it. However, US President Trump and Chinese Vice Premier Liu shook hands at their recent meeting in the Oval Office, signifying possible negotiation progress.
US-China trade talks are moving in the right direction but not without obstacles to address. A meeting between Presidents Trump and Xi Jinping is likely to be delayed until December.
In response to recent weakening global economic growth, accelerated by trade tariffs and a contentious global trade climate, the world’s leading central banks have begun to respond by turning their liquidity taps back on as concerns mount over the possibility of a further slowdown in global economic growth and additional weakness in corporate earnings.
The US Federal Reserve Bank recently cut their interest rates whilst in Europe the new President of the European Central Bank, Christine Lagarde, reckons that the majority of the 19 eurozone members have budgetary room to fight the current slowdown in Europe. Germany may pose the biggest and most pressing problem for the new ECB president, given Germany’s previous issues with Lagarde’s predecessor, Mario Draghi, and his ECB asset-buying program, also known as quantitative easing.
The question, then, is how low can interest rates go, given that they are already in negative territory in Europe and Japan? The Federal Reserve Bank has scope to cut interest rates further, but, because further cuts have already been priced into the markets, a failure of such cuts to materialise could produce disappointment.
Additionally, negative interest rates, which first hit financial headlines in 2014, have delivered US$17 trillion of negative-yielding bonds, with five of the leading central banks opting to enforce negative rates. This amounts to a quarter of the world’s economy opting for this extraordinary strategy.
Newly appointed International Monetary Fund Managing Director, Kristalina Georgieva, has launched an investigation into the dangers and impact of low and negative rates, considering that central banks could run out of options against an impending financial crisis.
In Britain, the General Election campaign is officially underway, introducing five weeks of further uncertainty into the UK stock market. At present, polls show Boris Johnson’s Conservative Party with a healthy lead; yet, previous election outcomes show that the electoral landscape is unpredictable.
Whilst the outcome of this General Election is likely to resolve the Brexit deadlock, Britain’s future relationship with the European Union could prove to be a more challenging issue to resolve, which means that the UK’s financial markets, and sterling, could remain volatile for the immediate future.
In recent weeks, sterling has reacted positively to events at Westminster, including the announcement of the 12 December 2019 General Election. The pound recorded its best monthly performance in more than a decade in October as it recovered to touch US$1.30, on the perception that a no-deal Brexit possibility had declined.
Too many unknowns remain attached to the outcome of the General Election, and subsequently to Brexit, to be able to formulate a practical view on UK stocks, bonds and sterling, other than to note that the UK equity market and sterling look inexpensive if both future events come to fruition.
However, what looks certain is that regardless of the party that wins the election in December, a period of fiscal expansion is forthcoming. This will allow more spending on infrastructure, hospitals, schools, housing and public transport.
In the FX market sterling remained steady as investors put possible Brexit outcomes aside ahead of December’s General Election. Meanwhile the US dollar was resurgent due to the largely positive tone coming out of the trade talks between the US and China. The Norwegian and Swedish krona gave back some of their recent gains against the euro.
In the energy market the price of Brent Crude oil was relatively unchanged over the week whilst in precious metals the price of gold bullion drifted back as investors increased their exposure to risk assets, such as equities. Gold will likely gain further investor interest in 2020.
This year is likely to show that global equities, bonds and gold all produced positive returns for global investors despite a slowdown in activity and falls in corporate profitability. The inversion of yield curves, worries over an imminent recession, trade tariffs and an unresolved Brexit have not deterred investors’ risk appetite or overall faith in investable assets. Indeed, if anything, 2019 has been a year of buying on the bad news and selling on the good.
This has largely depended on investors focusing on central bank policy, and how it and central bank actions will promote growth by continually turning the liquidity tap back on. In 2020 this could be the biggest stimulus for markets to rise further as investors add to their global equity positions.
That said the markets will still be looking for a trade deal between the US and China and a resolution to Brexit. Equally, after a good year for returns both bonds and equities look expensive in the short term – with the aforementioned more so.
The expensive government bond markets remain supported by low interest rates and further central bank buying whilst global investors will continue to hunt down good quality global equities; however, future corporate earnings growth will be of paramount importance. Companies that disappoint could be punished.
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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