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Global Markets to 15 April 2019


Highlights

  • The US corporate earnings season is underway, pushing the S&P 500 Index up to over 2900 for the first time since October.
  • China’s latest economic data is better than the market was expecting, signalling a possible recovery.
  • The outlook for global growth seems to be more positive again, improving global investor sentiment.
  • A healthier global growth outlook helps to push the 10-year German bund yield back into positive territory.
  • The European Union and the UK government agree to extend the Brexit deadline to 31 October 2019, averting a no-deal exit on 12 April.
  • The backdrop for the financial markets remains bullish, but there will be some volatility along the way.


Global Market Summary

Global stock markets continued to rally higher at the end of the week, helped by monetary policy remaining subdued, as well as by a positive start to the US corporate earnings season and signals that the global economic backdrop is improving.

The US market gained further momentum on the back of early earnings reports from companies such as JPMorgan: the financial institution delivered the biggest ever quarterly profit for a US bank – US$9.1 billion. Even scandal-dogged bank Wells Fargo announced better-than-expected profits.

Wall Street was also buoyed by oil and gas giant Chevron’s decision to buy Anadarko Petroleum in a cash and stock deal valued at US$33 billion. Similarly, the unveiling of Disney Plus – Walt Disney’s streaming service – was very well received by the market and investors at its investor day, held at its Buena Vista studios in California.

Disney Plus will compete with other video streaming services, such as Netflix, and will be advert-free: customers will pay a monthly fee to access a vast library of Disney’s and Fox’s legacy content, as well as new exclusive TV shows, films and documentaries. The service will also bundle Hulu and sports-focused ESPN Plus.

Device support for the over-the-top subscription-based video-on-demand service will include PCs, smart TVs, video game consoles and mobile platforms.

Although Disney’s presentation slides included pictures of Chromecast, Apple TV and Amazon Fire TV hardware, the company has yet to confirm whether or not it will be available on these particular devices.

In China, exports for March surprised the markets and were significantly higher than expected. Dollar-denominated exports rose by 14.2% compared with one year ago. Dollar-denominated imports, however, were down 7.6% over the same period. Overall this gave China a March trade surplus of US$32.64 billion, according to Reuters’ and Dow Jones’ calculations.

However, these numbers could be attributed to certain seasonal factors, rather than just a turnaround in global demand. The next few months’ data will, therefore, be carefully scrutinised by the market, and will play a key role in determining future growth targets – particularly now that the International Monetary Fund has cut its forecast for global economic growth for 2019 from 3.5% to 3.3%.

Meanwhile, hopes are high for a trade deal between the two superpowers, helping the Chinese stock market to rally by around 30% so far this year. The announcement that more Chinese stocks are to be added to the MSCI indices, and that an asset allocation in Chinese onshore bonds is to be included in the Bloomberg Barclays Global Aggregate index have also helped the Shanghai and Shenzhen stock markets.

Better-than-expected Chinese trade data and a strong start to the US corporate earnings season have generated further short-term tailwinds for financial markets. Although recent pessimism over future global growth has slightly dented investor sentiment, the global economy is in better shape than some might have led us to believe.

Interestingly, the yield on the German bund rallied by more than 6.5 basis points last week on the news about Chinese imports and exports and suggestions of an improving global growth outlook. But we are not yet out of the woods: the biggest short-term risk remains a collapse in the tariff talks between Washington and Beijing, followed by a monetary policy error by the US Federal Bank.

The European economy remains weak, affected by Chinese trade and Brexit: a new deadline of 31 October has now been agreed after last week’s was missed. This extension was critical for the UK economy and sterling – a no-deal exit would have been devastating.

However, this means that if the UK remains in the European Union, for the time being, it will have to take part in the EU Parliamentary elections of 23 May and return representatives in July. Theresa May remains hopeful that this can be avoided with the ratification of the withdrawal agreement before 22 May.

But a divided Tory party has forced the Prime Minister to approach the Labour Party to discuss Brexit plans, and the prospect of these talks ending with some form of agreement currently seems very remote. It is difficult to see what might break the deadlock and further extensions cannot be ruled out.

Meanwhile, the UK economy continues to struggle, with business surveys suggesting a weak growth environment. As for monetary policy, the Bank of England seems to have its hands tied. Although it is keen to raise interest rates to more normal levels, doing so now seems impossible given the Brexit deadlock. Brexit-related issues may prevent the Bank of England from raising interest rates until November or beyond.

Nevertheless, the backdrop for financial markets remains fairly bullish, with the US playing a pivotal role. Indeed, during a call with analysts, JPMorgan’s chief executive Jamie Dimon said economic growth in the US “can go on for years. There’s no law that says it has to stop”. And the US economy is currently in the middle of a Goldilocks period.

In other words, it is enjoying a period of moderate economic growth and has low inflation, meaning that the Federal Reserve Bank can maintain its market-friendly monetary policy. A Goldilocks economy may occur during the recovery and or growth phase and is part of the business cycle. Any Goldilocks economy should be considered temporary – a more normalised economic backdrop is bound to emerge at some point.

If corporate profitability remains favourable and the political landscape tolerable, then risk assets are likely to continue to do well: so far this year, we have seen the MSCI World Index rise by 14.6%, with our leading home index, the FTSE 100, up by 10.5%. But it’s Wall Street that is driving the equity bull market, with the S&P 500 Index up by just under 16%, while the heavily-weighted technology index – the NASDAQ 100 – is up by over 20%.

Admittedly, there are a number of risks out there that could bring about another December-style flash crash, such as a collapse in US-China trade talks, a monetary policy error or a hard Brexit.

A further rapid rise in the price of crude oil could create problems. Petrol prices in the US are currently at risk of hitting the US$3-per-gallon milestone. If they do, the consequences could be higher inflation over the summer months – something that the Federal Reserve Bank will be watching for carefully.

Nevertheless, the markets remain bullish, so investors may well continue to buy on the dips, while using bond and currency markets as safe-haven status assets in times of uncertainty.


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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