Global Markets to 18 February 2019
- Wall Street continues to rise, registering its eighth straight weekly gain and its longest winning streak since November 2017.
- In Europe, the euro weakens as European Central Bank officials begin to express concern over slowing eurozone growth prospects.
- Confusion reigns in Westminster as Prime Minister Theresa May suffers another Commons defeat.
- The Chinese stock market has enjoyed a resurgence this year, while global investors have reduced their exposure to the European bourses.
- Regarding commodities, both gold bullion and oil begin to climb higher following changes in sentiment and impetus.
- Global equity markets continue to show strong upward momentum, with the MSCI World Index is now up nearly 10% since the start of the year.
Global Market Summary
Positive sentiment towards global equities continued to push markets higher last week, with Wall Street registering its eighth straight weekly gain and its longest winning streak since November 2017.
However, most of the positive sentiment on the markets can really be attributed to global investors continuing to believe that Washington and Beijing will finally carve out a deal, thus averting any escalation in the US-China tit-for-tat trade tariff war.
Although talks between Chinese Vice Premier Liu He and US trade representative Robert Lighthizer seem to have yielded very little progress so far, investors remain optimistic that a resolution will be found before the 1 March 2019 deadline.
Cordial talks between the two superpowers (hopefully paving the way to an agreement) are extremely important – both for the global economy and from a domestic perspective. In fact, Chinese stocks have already enjoyed a revival this year, catalysed by China’s recent central bank stimulus, a more dovish US Federal Reserve Bank, friendlier relationships between the two superpowers and global investors looking to take advantage of some excellent Chinese companies that have floundered in the bear market of 2018.
In recent weeks, European bourses have logged their worst outflows since July 2016 and at their fastest pace since the aftermath of the Brexit referendum. Surprisingly, this is on the back of European Bourses and stocks recording their best January rise since 1987. Britain’s complex exit from the European Union and (possibly more worryingly) the EU’s slowing economic growth have made investors look elsewhere for investment opportunities.
Continental Europe is predominately an export economy: its typical end customer is to be found in the world’s emerging markets or in China. Consequently, trade war worries, concerns over rising interest rates and a strong US dollar have all encouraged short-term investment outflows out of Europe. Last week also saw a fair amount of positive momentum trading, pushing both French and German stocks 2% higher.
In the UK, Prime Minister Theresa May suffered another defeat in the House of Commons over the current motion endorsing the government’s latest negotiating strategy on Brexit. While this latest defeat has no legal force, it puts more pressure on the Prime Minister as she once again approaches the European Union to try and secure changes to the Irish backstop and finally deliver Brexit.
In the commodity markets, the price of gold bullion has continued to nudge higher, driven by the expectation that the US dollar is nearing its peak and will eventually begin to weaken. While it’s not uncommon for the US dollar and gold to rally together, the trend has never proven sustainable. A number of factors are clearly affecting the US dollar – growing recession fears, weaker manufacturing data and a Federal Reserve Bank that does not look likely to raise interest rates any time soon.
Consequently, gold bullion might have an interesting investment backdrop and its price could move higher; and from a technical perspective, it is not in overbought territory. So if the US dollar were to weaken and were the central bank to remain dovish, then gold could move higher on a momentum trade. Furthermore, if prices rise significantly over the coming months, then perhaps the gold miners will become more attractive for investors as a way of increasing their exposure to it.
Similarly, the price of crude oil is breaking out to the upside as the proposed sharp pull-back in OPEC’s output begins to kick in. The oil market is being boosted by a number of other factors, including the threats of militant attacks on Nigeria’s oil infrastructure in the run-up to its impending presidential elections, the ongoing conflict over Libya’s biggest oilfield, issues affecting Saudi Arabia’s largest offshore field and US sanctions imposed on Venezuela’s state-owned energy company.
It would be remiss of us not to mention that global equity markets have enjoyed a fantastic start to 2019: the MSCI World Index is already up by nearly 10% since the start of the year. But investors would be foolish to believe that this will continue. The devastation that the markets suffered in December was obviously an over-correction: they are now experiencing a retracement of those events over a ten-week period.
Historical statistics tell us that the stock market is off to its best start in 32 years, and there are a number of factors behind this, excluding the “V”-shaped recovery since the end of December. Favourable valuations, a dovish Federal Reserve Bank, encouraging trade talks between the two superpowers, reactions to a weakening US dollar and investors instinctively deciding that it’s time to load up again in risk assets are all factors.
However, it is likely that the equity markets are suffering from a dose of irrational exuberance and are slightly ahead of themselves. This means that there will be a pull-back at some point, but not to the same extent as those December lows. A trade deal between Beijing and Washington, dovish central bankers and asset allocators rotating their positions could all contribute to a positive backdrop for global equities.
Nevertheless, global investors might be wise simply to “drag their feet” a little over the coming weeks with any new capital they have and choose to “buy on the dips” rather than just “chase the markets”. The demographics of the world are changing rapidly, providing global investors with an abundance of new opportunities, and this will be a continuing theme for many years to come. So time is on the side of the patient investor.
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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