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Global Markets to 14 October 2019

 

Highlights

  • Global equity markets continue to be buffeted by US-China trade tensions and Brexit, but recent talks offer optimism.
  • Global bond yields are at a 120-year low with signs of falling further as central banks discuss additional rate cuts and quantitative easing.
  • Federal Reserve Bank Chairman, Jerome Powell, says Fed to expand its balance sheet in response to funding issues.
  • In Europe, Brexit uncertainties remain, but the recent European Central Bank stimulus package is bolstering market sentiment.
  • The “Brexit exit” and the future of the UK economy: dilemmas for business, employment, financial markets and sterling.
  • Corporate profits are barely growing; almost US$15 trillion of debt trading at yields below zero; leading global indicators looking precarious – but global equity markets resilient.

Global Market Summary

Global equity markets continue to be buffeted by reservations about possible outcomes of the current US-China trade talks. While the market reflects a feeling that the superpowers are trying to negotiate a settlement, there is no easy – or likely – long-term fix for the issues that now divide Washington and Beijing.

President Trump may have begun trade-war hostilities with China, but other leading US political leaders, such as Elizabeth Warren, the influential left-wing candidate for the 2020 Democratic Party nomination for president, and Joe Biden, former US vice president and also a challenger for the Democratic Party presidential nomination, have both voiced support for the president’s current stance on trade with China.

As talks resume, the United States and China have an opportunity to negotiate an agreement on a range of issues, but intellectual property and technology will continue to pose challenges

The ubiquity of global information technology and social media has created uncertainty for and questions around national security. This has not gone unnoticed by many leading politicians and government officials – Donald Trump in particular. Digital technology could, as a result, continue to be a sticking point in any current or future trade talk negotiations.

Looking at the wider global economy, mixed messages continue to influence market sentiment: corporate profitability is beginning to suffer; around US$15 trillion of debt is trading at negative yields; trade disputes rumble on; Brexit casts a shadow over Europe; geopolitical risks persist in the Middle East, all while inflation and unemployment rates remain at historically low levels.

The slowing of the global economy has made central bankers wary of future outcomes. US Federal Reserve Bank Chairman, Jerome Powell, commented that the weakening of the global economy over the past 18 months has created concern. However, US interest-rate policy will depend on future economic data and global developments on trade, Brexit, and other important issues.

The Fed is expected to cut US interest rates by a further 0.25 basis points at the end of October and again before the end of 2019 in response to the risk to future global economic growth posed by the aforementioned issues.

Dovish central bank policies and a ravenous appetite from bond investors has led to global bond yields falling to a 120-year low, leaving strategists to wonder whether this bond rally will ever run out of steam and the US Treasury market will finally see negative yields. An aging global population creates additional pressure in driving down global bond yields.

In Europe, internal issues and Brexit remain as uncertainties, but the recent stimulus package announced by the European Central Bank has bolstered market sentiment within the eurozone.

In September the European Central Bank President, Mario Draghi, unveiled the ECB’s latest stimulus package, the resumption of its quantitative easing programme, activating €20 billion per month of government bond purchases. The stimulus package is Draghi’s last act as ECB president, as the presidency transfers to Christine Lagarde, who was seen as a dove in her previous appointment as Chair of the International Monetary Fund.

With the German economy on the brink of a recession and business confidence at its lowest level in seven years, the German government is under growing pressure to respond; some economists argue that Berlin should launch its own stimulus programme.

But it’s the “Brexit exit” and the future path for the UK economy that is taking centre stage as the 31 October deadline approaches. The UK’s path to Brexit remains unclear with three scenarios still open for debate.

If the United Kingdom were to leave the European Union without a deal, there will be no transition period and all current European Union trade deals would stop. Should this happen, customs borders would be created, causing significant blockages and interruptions in the delivery of goods.

In the no-deal scenario, it is expected that sterling would dramatically fall against the US dollar and the euro and that the FTSE 100 Index might rise on the assumption that this would benefit UK-based international exporting businesses. However, the likelihood of Britain suffering from a technical recession increases dramatically.

If the United Kingdom were to leave with a deal, it is expected that that the value of sterling would rise, and inflation would temporarily dip, helping households by boosting real income growth. This scenario predicts that business investment would eventually rebound, which would give the UK economy a boost after contracting in recent quarters, and would see the government increase its spending programme policy.

Britain and the European Union would still have a difficult relationship until further negotiations were completed, but the immediate risk of disruption would be removed.

Finally, if the United Kingdom were to revoke Article 50 and remain in the European Union, it is expected that sterling would rise to the levels seen before the UK voted to leave the EU. Similarly, international investors might return and increase their asset allocations towards UK-sited assets, given that the UK stock market and currency look relatively cheap.

Talks between the UK and the EU have intensified in recent days with the Brussels summit on Thursday and Friday of this week being heralded as the final chance to get a Brexit deal over the line before the 31 October deadline. However, any deal achieved in Brussels this week will still need to be ratified by a special sitting of Parliament on Saturday.

The Queen will deliver her speech on Monday, the 14 October outlining the government’s legislative agenda, giving MPs the chance to debate its content throughout this week.

Overall, the financial markets have entered a difficult period with corporate profitability barely growing, almost US$15 trillion of debt trading at yields below zero, and many global leading indicators looking shaky, but global equity markets remain resilient as they look for a positive outcome to trade talks, Brexit, and the probability of further central bank loosening.

In a year of confusion, the global leading indicators suggest that economic conditions remain sluggish with forecasts for future global GDP growth on the decline. With this economic backdrop we expect to see global expansion at a sub-three per cent level with the possibility of a global recession on the horizon.

In this scenario, we remain cautious in relation to bonds, instead favouring global equities with cash being a short-term asset allocation alternative for new incumbents to the markets. While choppy waters lie ahead, there are still investment bright spots, given that global equity markets will get a further near-term boost from monetary stimulus in the coming months.


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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