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Global Markets to 20 January 2020

 

Highlights

  • Washington and Beijing sign a historical “phase one” interim trade agreement, but the deal fails to tackle some of the more contentious issues, making phase two interesting.
  • Britain’s retail sector contracts in December, resulting in the longest spell of zero growth since records began. Will this lead to the Governor of the Bank of England cutting interest rates?
  • The UK chancellor adopts a hard stance, advising business leaders to adjust to the reality of leaving the European Union by the end of 2020 and to focus on new and exciting trading partnerships.
  • In the US, corporate earnings season gets under way with an early rush of numbers that are decisively beating estimates, while Google owner Alphabet becomes the fourth US-listed company to hit the US$1 trillion market cap level.
  • In the commodity markets, gold continues to gain from investor sentiment, while easing US-Iran tensions mean that the price of Brent Crude Oil remains unchanged
  • Global equity markets continue their relentless rise, but have they become detached from reality as euphoria seems to be taking over? And what of the January barometer?

Global Market Summary

It seemed at one point last year that the long-awaited trade deal between the United States and China would never happen. But it has: the two global superpowers finally signed the phase one deal in Washington DC last week. Although good news, the deal failed to tackle some of the more contentious issues – such as cyber espionage – and so the market remained rather muted while trying to digest and analyse the 86-page agreement.

The race was on to avert any further escalation between the two superpowers – China’s domestic economic backdrop was suffering greatly from last year’s tariffs, affecting global growth, as well as creating a possible backdrop for a recession in the US in 2020. Since President Trump is entering a presidential election year (having just been impeached), further escalation would not have been in his best interests.

Although this latest signing ceremony has reassured the markets that progress has been made and that further phase agreements could be in the pipeline, there is still a very long way to go. Furthermore, the agreement contained no references to issues such as independent arbitration and only very limited external references to world bodies, such as the International Monetary Fund and the World Trade Organisation.

However, China has agreed to purchase around US$200 billion worth of US goods over a two-year period. Although this includes almost doubling its agricultural purchases of US$40 billion, US farmers are probably not that impressed with the deal, given recent falls in the prices of soybeans, wheat and corn. The deal was also a little short on detail regarding China’s purchases of soybeans from the US.

The Chinese administration does, however, appear to have made concessions on a number of delicate issues, such as intellectual property, currency and access to financial services. It has also given assurances that it will halt the practice of forcing companies to turn over their technology. In exchange, the US has agreed to reduce or do away with some tariffs, although taxes on US$360 billion worth of Chinese goods will remain in place for the time being.

President Trump is heralding this as a huge win, but the US administration did not achieve all of its goals of bringing about structural changes to the Chinese economy in relation to the huge subsides Beijing gives to Chinese companies. Nevertheless, the phrase “phase one and done” has had a fairly positive effect on Wall Street, although that has not prevented a number of sceptics referencing the frustrations that lie ahead regarding phase two.

In the United Kingdom, Britain’s retail sector contracted as – for a record fifth month in a row – consumers failed to increase their spending in December. This latest data makes it the longest spell of zero growth since records began, raising expectations that the Governor of Bank of England, Mark Carney, might cut UK interest rates sometime soon, or indeed implement quantitative easing again to try and kick start the economy if it remains weak.

Meanwhile, UK chancellor Sajid Javid has issued a harsh message to business leaders about the UK and Brussels, telling them that they have had three years to prepare for new trading relationships. Brexit is clearly going to happen and there will be an impact on businesses. The most important thing is therefore for all businesses to prepare for the future.

But over the coming few weeks, the markets are likely to focus on and be driven by the US corporate earnings season, now under way. The year has manifestly got off to a cracking start, especially on Wall Street: a further half a trillion dollars of value has already been added to the S&P 500 Index.

In this initial period, US corporate earnings numbers are beating estimates decisively. but it’s early days. The S&P 500 Index has also soared by around 12% since the beginning of October, which suggests that investors may be getting a little carried away by optimism and euphoria.

The problem is that the difference between meaningful fundamentals – such as corporate profitability – and euphoria can get distorted by irrational exuberance. This could then lead to a nasty pull-back on any disappointments or bad news. Expectations are very high, and it may be that the markets have got ahead of themselves and become detached from the real economy over the short term.

Meanwhile, in the commodity markets, the price of gold bullion continues to rise as investors seek an alternative asset class to equities, bonds and property, and also something that might protect them from an equity market correction: gold is deemed to be a safe-haven asset class in times of doubt.

Any additional fears that may affect the markets over the coming year could see the yellow metal gain further ground. Gold obviously does not generate any kind of an income for investors. This means they make or lose money from changes in the price of gold, or in currency exchange rates. Equally, buying negative-yielding government bonds from certain countries in these extraordinary times makes no sense, so the “opportunity cost” of gold has fallen to its lowest level in decades.

Therefore, by selling negative-yielding government bonds to buy gold makes more sense: you are effectively increasing your income. Furthermore, when there are concerns about the strength of the global economy and interest rates are at zero or at negative levels, holding gold is a good option. It is also a good hedge against disinflationary headwinds.

To sum up the start of 2020, global equity markets have continued their relentless rise (buoyed by the signing of a satisfactory phase one trade agreement between the US and China), there has been less focus on Brexit and more on Megxit, the US corporate earnings season has got off to a good start, and some global investors who are holding too much cash and feeling that they are missing out have capitulated. Momentum is evidently with “risk on” investors, and this could continue for at least the next few weeks. However, the markets seem to have got ahead of themselves and it is likely that we will experience a pull-back at some point.

But this could turn out to be another buying opportunity for equities – given the continued generosity from the central banks and their monetary policies, together with the unattractiveness of the bond markets. To conclude, it is often said that when Wall Street registers a gain in January… so goes the rest of the year. With data going back to 1950, this old Wall Street indicator has been right 87% of the time with only nine major errors.

While some market professionals are sceptical about the “January barometer”, historical statistics support it and it is considered a golden nugget fact.


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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