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Global Markets to 24 February 2020

 

Highlights

  • Downbeat economic data, partly linked to the coronavirus, takes its toll on global equity markets.
  • In the US, the technology-heavy NASDAQ index falls following Apple’s warning that it will not meet its financial guidance for the current quarter because of Covid-19.
  • The search for safety by investors triggers a further rally in government bonds and gold.
  • In the UK, new Chancellor Rishi Sunak confirms that the date of the next budget will remain unchanged – 11 March 2020 – despite his predecessor’s resignation.
  • Substantial damage has already been done to the Chinese economy as global cases of the coronavirus increase, with a knock-on effect around the world.
  • In 2019, markets were mainly driven by trade war concerns, ever-changing economic expectations and geopolitical events. So far this year, the coronavirus has been the main factor driving market movements.

Global Market Summary

Global equity markets retreated last week over concerns that the global economy’s backdrop was weakening. These concerns were catalysed by the latest US data for the manufacturing and service sector, which appears to have contracted for the first time since 2013. In Europe, Germany’s central bank has warned that its economy remains sluggish, while the damage done to China’s economy by the coronavirus will be significant in the short term. This can only have negative repercussions for equity markets over the coming weeks as the Covid-19 outbreak takes its toll on the global economy and hits corporate profitability for many companies.

In the US, Apple became the first mega-cap company to announce that it will not meet its revenue projections for the current quarter because of the virus, sparking fears that limited iPhone production and reduced demand from China could affect its profitability. Similarly, some of the world’s largest shipping and cruise industry businesses are beginning to suffer alongside those of the airline industry, such as Qantas. And global travel restrictions are hitting some of the world’s largest luxury goods businesses.

The first couple of months of 2020 have evidently seen a slowdown in global growth. As yet, no official forecasts have been produced of just how severe the consequences will be over the first quarter of this year, but economic output will most likely take a substantial hit.

Supply chains will be affected by shortages of important components from China. And outside China, the travel restrictions in place in many parts of the world to contain the virus have already affected attendance at conferences and other events. The knock-on effect in the energy market has pushed the price of oil down by as much as 20% and there have been comparable price movements for many of the leading commodities.

Although governments and central banks are not yet willing to accept that a general virus-created recession might be on the cards, the leading central banks of Japan, China, the Eurozone and the US have all taken monetary steps and initiated credit action to keep the markets liquid: they have pumped cash into their economies to try and prevent an actual fall in output and stave off a subsequent recession.

These short-term jitters have understandably led to some investors increasing their asset allocations towards the relative safety of core government bonds and gold. This has resulted in the 30-year US Treasury yield hitting a record low. Conversely, the price of gold picked up pace to reach its highest level since February 2013, driven by concerns over future corporate earnings and fears that the epidemic might last longer than the markets are anticipating.

Meanwhile, in the UK, the recent resignation of former Chancellor of the Exchequer Sajid Javid and Prime Minister Boris Johnson’s cabinet reshuffle caused some uncertainty as to whether or not the forthcoming budget would go ahead as planned, but the new Chancellor Rishi Sunak has since confirmed that it will indeed be delivered on 11 March 2020.

Elsewhere, the UK’s chief Brexit negotiator David Frost has warned Brussels that if the European Union expects the UK to maintain alignment with European rules, then the bloc has completely failed to understand the reasoning behind the UK’s decision to leave in the first place.

EU negotiator Michel Barnier retaliated by saying that the bloc was ready to offer an “ambitious partnership” with the UK post-Brexit, but its “particular proximity” meant that they would not be offering a “Canada-style” trade deal.

As far as the UK’s economy is concerned, the news has been more positive: the IHS Markit Household Finance Index jumped to 47.6% in February, up from 44.6% in January. And in January, manufacturing output grew at its fastest pace since April last year. This has left British manufacturers feeling more upbeat about the outlook, according to the Confederation of British Industry. In other positive news, the Office for National Statistics noted that house prices were rising again across the UK for the first time since February 2018 and that employment had hit a record high.

UK inflation has also risen to a six-month high of 1.8%. This can largely be attributed to higher prices at the pump and to airfares having fallen by less than they did a year ago. All of this combined to push sterling above US$1.30, with foreign exchange traders now pricing out the probability of a 0.25 basis point rate cut by the Bank of England any time this year – they believe that an expansion in spending by the new Chancellor in his budget will help boost growth and inflation.

As we look forward to the rest of 2020, the likelihood is that many of the drivers from 2019 will carry over into this year. These include the US-China trade talks, Brexit and politics – the focus this year will be on the US presidential elections in November. Unfortunately, the “unknown unknowns”, such as the Covid-19 outbreak, will create anxiety and (at least at times) higher levels of volatility in the markets. But history has taught us that panic creates opportunity.

We therefore expect a year of two halves, with some sort of correction somewhere along the line. After all, the current bull market of nearly 11 years is now the longest in history. But of course, it is difficult to identify what factors might result in it ending. Nevertheless, we are not expecting to see a recession this year. Indeed, almost every central bank is now easing its monetary policy. Governments are joining in and increasing public spending – a relatively rare occurrence.

Any meaningful correction is therefore likely to lead to a further “buy on the dips” approach on the part of investors. But how much is left in this bull market is difficult to determine. All we can do for now is keep a close eye on the language used by the Federal Reserve Bank and watch out for any changes in inflationary pressures; and as far as political events are concerned, try and gauge what a Donald Trump win in November will mean for the 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.

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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