Global Markets to 21 October 2019
- Global equity markets slip further following an action-packed week around the world.
- Trade talks between the US and China paint a nuanced picture.
- China’s recent weaker economic growth data affects global economic growth sentiment.
- Brexit drama continues as the PM’s revised deal is debated in Parliament on Saturday.
- The latest Brexit developments push sterling up against both the US dollar and the euro.
- A global equity market rally seems feasible as we head towards the year end.
Global Market Summary
An eventful week saw global equity markets once again buffeted around by trade talks between the US and China, the next chapter in the Brexit saga and fears over a slowing down of the Chinese economy.
Although there is cause to be optimistic that a trade deal will be struck between the US and China, the prospect of disappointment remains. Before the announcement of a partial deal last week, there was still a lack of detail and Beijing had reneged on some of its promises after the US House of Representatives passed a bill criticising the country’s responses to protests in Hong Kong – a move that was met with indignation by the Chinese authorities.
However, the two sides have made substantial progress on trade talks, laying the foundations for a phased agreement.
Indeed, President Trump recently indicated that he believed that a trade deal would be signed between the two superpowers before the Asia-Pacific Economic Cooperation meetings take place in Chile on 16 and 17 November.
While the so-called phase 1 deal has been unveiled in both Washington and Beijing (and is likely to be signed by both parties), US officials believe that the second phase of negotiations will be significantly harder to complete – given issues over technology and intellectual property.
The trade war has also created a negative backdrop for the Chinese economy: third quarter economic growth rates have slowed to an annual rate of 6% – their weakest in almost three decades. This slowdown has hit both factory production and investment sentiment.
However, Chinese vice Premier Liu has said that China will step up investment in core technologies to accelerate economic restructuring, adding that economic prospects in China remain “very bright”. He went on to say that China was not worried about short-term economic volatility, and the Chinese politburo committee is made up of thinkers who adopt a very long-term approach to their political and economic outlook.
In the UK, the Brexit saga continues. Prime Minister Johnson brought back his recently-renegotiated withdrawal agreement for debate at a special Saturday sitting of the House of Commons – something not seen since 1982. But the House was unable to vote on the revised Brexit deal on “Super Saturday” – MPs voted by a majority of 16 to back an amendment put forward by former cabinet minister Sir Oliver Letwin.
The Letwin amendment has scuppered any chance of the House being able to vote on the new deal until Prime Minister Johnson has secured an “insurance policy” extension to the Brexit deadline of 31 October 2019.
Without the crucial vote on the Johnson-revised deal, the PM has been mandated by newly-passed UK legislation to write to the leaders of the European Union and request another Brexit extension – something that he said that he would never do.
All 27 EU leaders will now need to agree to a new Brexit extension. A number of them may voice their disapproval, but in all likelihood, they will agree to one (although they may insist on it being a short-term one).
Perhaps more importantly, the European Union may want to know whether there are plans for the UK to hold a general election, a second referendum or a confirmatory referendum on the new Brexit deal. But whatever happens in the House of Commons over the next few days, the EU leaders are likely to rule out any further negotiations or amendments to the new Brexit deal.
The government says that it will push ahead with its efforts to pass its Brexit deal through Parliament regardless – despite all of the major upsets it has suffered over the weekend.
As far as the UK market is concerned, the pound continues to gain ground against both the US dollar and the euro as the chances of a no-deal Brexit recede. The shortened odds of this happening have also seen the FTSE 250 Index gain momentum: the index now registers a gain of 16% over the year as a whole.
UK-sited assets have been unloved by most international investors in recent times as the spectre of Brexit has clouded investment prospects for the region. The weekend’s events mean that the waters remain muddied. A general election seems inevitable – whatever the outcome of Brexit – since all the parties have demanded one. But it is likely to be a closely-fought affair, leading in all probability to a coalition government.
From a wider perspective, global investors have spent most of this year pondering and worrying about the outcomes of a trade agreement between the US and China, the end of the Brexit saga and the geopolitical risks that have dampened investment sentiment.
But the global equity markets are now set up for a potential rally as we move towards the end of the calendar year. With a phase 1 trade agreement due to be signed by both Washington and Beijing, the prospect of there being a smoother transition period as the UK exits the EU and with central bank policy continuing to favour looser monetary conditions, a “risk on” surge seems increasingly likely.
Nonetheless, this year has been dominated by uncertainty and (at times) disbelief. An unforeseen political event or a central bank policy surprise could still shock the markets with a meaningful pull-back. Last December is still fresh in the minds of many global investors.
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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