Global Markets to 23 September 2019
- Global equity markets react with circumspection to central bank policy, trade discussions and a spike in the oil price.
- Trade talks between the US and China are reported to have been constructive and the two superpowers are to engage in further dialogue in October.
- The Federal Reserve Bank cuts interest rates while pumping further funds into the market, but the President criticises the Fed’s lacklustre strategy in a series of harsh tweets.
- In the UK, the Brexit saga rumbles on as mixed messages emerge from the European Union.
- The price of crude oil soars following a drone attack on Saudi oilfields, heightening tension between the US and Iran.
- Global equity markets are expected to continue to deliver better investment returns than bonds. But there are enough reasons to remain fairly cautious in relation to both asset classes.
Global Market Summary
Global equity markets reacted with a level of circumspection last week following the news that the US Federal Reserve Bank had cut interest rates, trade discussions had resumed between Beijing and Washington and oil prices had spiked, helping to lift European oil stock prices.
The markets were more focused, however, on what the US Federal Reserve Bank might do regarding interest rates – particularly since US President Trump had indicated that he expected more action from the Fed following the European Central Bank’s decisions last week.
But following the Fed’s announcement that it would cut its main policy rate by a quarter of a percentage point to a range of 1.75% – 2.00% and pump a further US$75 billion into the market, the President declared that Fed Chairman Jerome Powell had “no guts” and that his latest actions were insufficient.
While this one-notch cut was in line with analysts’ expectations, it was probably the banks’ future projections that were interpreted as being more hawkish than most were anticipating. And with Donald Trump desperate to keep the US market buoyant in the run-up to the 2020 US presidential elections, the low regard in which he holds Jerome Powell is creating a difficult relationship between Washington and its Central Bank.
Another source of increasing displeasure among some members of the Federal Reserve Bank and the European Central Bank is the direction in which interest rates are currently heading, with some questioning the urgency with which quantitative easing should be resumed. Some are suggesting that the current state of affairs is not quite so bad as the markets are indicating, and that it would be prudent to keep some ammunition dry.
As far as the latest developments regarding trade talks between China and the US are concerned, there have been reports of constructive discussions in Washington and a joint commitment to maintaining dialogue about related issues. Details of the next round of trade talks in October have also allegedly been discussed.
Chinese officials were expected to visit US farmers next week as a goodwill gesture. However, they changed their travel schedule at the last minute and headed back to China – a move which was greeted with a measure of uncertainty by the markets, particularly since the Chinese Embassy and the US Department of Agriculture did not immediately comment. However, the US Trade Representative’s office did issue a brief statement to say that after two days of productive dialogue, further talks will be held in Washington in October and will involve a number of top trade negotiators, including Chinese Vice-Premier Liu He, US Trade Representative Robert Lighthizer and US Treasury Secretary Steven Mnuchin. Consequently, the world’s two largest economies are fully expected to commence preparations to end their 14-month trade war. Or if things go badly, they will implement new higher tariffs on each other’s goods.
The week’s other major development was the spike in oil prices following a drone attack on Saudi oilfields. Initially, the price soared by 20% – its biggest percentage gain since Saddam Hussein invaded Kuwait. As one would expect, energy traders began to worry about output generated by the world’s biggest oil exporter, while the US blaming Iran for the attack did little to minimise geopolitical risk.
It was later announced that the Iran-backed Houthi militia in Yemen had claimed responsibility for the drone attack. Iran, however, has denied involvement. Soon after, US President Trump tweeted that the US was “locked and loaded”, which provoked a retaliatory reaction from the Iranian administration.
Although oil prices have indeed reacted nervously to these events, the level to watch for is around US$80 a barrel. Such a jump could have a pronounced and broader effect on the economy. Recent discussion of the inversion of the yield curve and subsequent concerns about an approaching recession are fascinating. But if one examines data going back to the 1980s, there have been no recessions without a 90% spike in the price of oil.
Rising geopolitical tensions between the US and Iran do indeed constitute another headwind for the global economy – and the markets will be mindful of this – but the short-term disruption to oil production should not trigger a global recession.
In Britain, Brexit rumbles on. EU Commission President Jean-Claude Juncker has told the European Parliament that time is running out to secure an agreement and that the risk of a no-deal Brexit is very real. However, in a further interview, Mr Juncker claimed that a Brexit deal could still be reached by 31 October, while according to Finland’s Prime Minister Antti Rinne, Prime Minister Boris Johnson must furnish written proposals for the conditions and implementation of the Irish backstop by the end of the month.
In the emerging economies, the Indian stock market recorded its highest one-day gain for a decade after Narendra Modi’s government unveiled a US$20 billion package of corporate tax cuts designed to revive the country’s fading economy. India could benefit from the US-China trade conflict, particularly in relation to the categories on which the US has imposed tariffs on China. As a result, other Southeast Asian nations – including Vietnam – could stand to gain from these trade conflicts.
Finally, as the third quarter of the year draws to a close and we look to the final quarter, uncertainties will continue to surround the outcomes of US-China trade talks, the future of Brexit and any exacerbated geopolitical tensions between the US and Iran. Global growth is manifestly a casualty of the US-China trade war and has slowed over the year. The balance of risks is therefore tilted firmly to the downside.
But central bank policy is likely to remain loose and inflation low. Consequently, global equity markets should continue to deliver returns, particularly since this year’s rally in bonds – the strongest in 20 years – has left equities looking more attractive than most bond markets.
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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