Global Markets to 25 February 2019
- Global stock markets continue to be buoyed up by optimism in relation to the trade talks and the likelihood of further positive dialogue among policymakers.
- Optimism regarding the latest US-China trade talks also helps Asian stock markets.
- European bourses enjoy a bullish week overall as trade talks and Brexit help create a more positive outlook for European assets.
- The US Federal Reserve Bank says it will now hold a larger balance sheet over the longer term. And their dovish U-turn has triggered the resurgence of the bull market.
- In the UK, tensions over Brexit have resulted in a number of Labour and Conservative party MPs defecting to form a new “Independent Parliamentary group”.
- While we are in the midst of a global economic slowdown, the authorities appear to be taking precautions to prevent a global recession; consequently, global equity markets have returned to their bull market run.
Global Market Summary
Sentiment towards global equity markets has remained very positive for the first two months of 2019 with the MSCI World Index up by over 10 %. The US Federal Reserve Bank’s recent unexpected U-turn, optimism regarding the ongoing trade talks and the renewed appetite for risk assets (equities) have completely turned things around since the horrendous December collapse.
Optimism regarding the current US-China trade talks is having a real impact on most markets, particularly those of the Asia-Pacific region. Similarly, China’s recent stimulus package appears to be positively affecting its economy and stock market – the Shanghai Composite Index has risen by more than 12% so far this year. One exception is Japan: its exports have been badly hit by the Chinese economic slowdown.
Speculation that Presidents Trump and Xi may be discussing options for a further meeting in late March is encouraging – the venue is likely to be Trump’s Mar-a-Lago residence in Palm Beach. China’s commitment to purchase up to US$1.2 trillion of US goods is also reassuring. Nevertheless, the two sides remain far apart over issues concerning the forced transfer of technology and intellectual properties.
Admittedly, US duties on US$200 billion of imports from China are still set to rise from 10% to 25% if Washington and Beijing are unable to reach an agreement by 2 March. However, President Trump has indicated that this date is not set in stone and that it could be reviewed if there were signs that progress was being made towards a longer-term solution.
In the eurozone, recent disruptive forces – such as the trade wars, Brexit and numerous domestic issues – have affected the region’s economic growth perspectives, resulting in an economic slowdown. But renewed optimism over some of these same issues (trade war tensions and Brexit) had a more positive effect on the European bourses last week, with the continent’s wider EURO STOXX 600 Index rallying alongside the likes of Germany’s leading index – the Xetra DAX – and France’s CAC 40.
The other most important factor currently influencing sentiment has been the US Federal Reserve Bank’s U-turn regarding the positioning of its balance sheet. The Fed is now saying that it will hold a much larger balance sheet in the longer term than it did before the financial crisis. This means that it intends to slow down its efforts to unwind its quantitative easing programme.
Its various statements last year suggested that its intention was simply to carry on reducing its balance sheet and become more aggressive regarding interest rate hikes. Consequently, the US 10-year Treasury bond yield reached a seven-year high of 3.25% in October 2018. But following this U-turn and the likelihood of no further rate hikes for the foreseeable future, the yield on US 10-year paper has fallen to 2.65%, while Wall Street’s Dow Jones Industrial Index has rallied to within 3% of its all-time high.
In the UK, a number of Labour and Tory party activists breaking away to form the new Independent Parliamentary Group has exacerbated the already tense situation regarding Brexit and the March 2019 deadline.
To date, eight Labour MPs and three Conservative MPs have resigned from their respective parties and joined the Independent Group. This has created a plethora of uncertainties and dilemmas in their individual constituencies and whether or not they should resign and seek re-election. However, as things currently stand, were they to stand in a by-election or a general election, the name – The Independent Group – could not be included on the ballot paper since it is not yet registered as a political party.
Prime Minister Theresa May’s response has been to assert that the Brexit vote must not be frustrated and that the government needs to focus on delivering it. The Prime Minister now hopes to engage in further talks with European Council president Donald Tusk and a number of other prominent EU figures in Egypt, where EU and Arab league country leaders are meeting in Sharm el-Sheikh. Downing Street, however, is playing down the likelihood of any breakthrough occurring in Egypt.
Following a difficult year-end for financial assets, leading to an abrupt valuation adjustment, the first seven weeks of 2019 have seen risk assets rebound. This positive adjustment has been boosted by the US Federal Reserve Bank’s change in rhetoric, increased optimism over the trade negotiations and greater overall confidence in the appeal of equity markets. We therefore now believe that investors can re-approach the areas known as risk assets (equities), particularly where the correction has brought some value back to share prices.
We have already seen many of those unloved regions of recent times become the more favoured hunting grounds for bargains in the first two months of 2019. Latin America, the wider regions of the emerging markets, Asia (excluding Japan) and China have struck an accord among global investors, while Wall Street has recovered and is nearing its all-time high again. In the UK, the FTSE Mid-Cap Index is outperforming its larger brother, the FTSE 100, while the prices of crude oil and iron ore have rallied by more than 25% and 19%, respectively.
Can the markets continue to rise? Much will depend on how the factors referenced above all play out, but history tells us that when Wall Street posts monthly gains in both January and February – which it has just done – then the year delivers a positive return.
In fact, there have been thirty years since 1938 during which both January and February delivered positive returns, and in twenty-nine of those, the market went on to deliver an overall positive return for the year in question; indeed, many of those annual returns were in excess of 20%.
With just four February trading days to go, the other fascinating statistic is that at present every style, size and sector on Wall Street is up over the past two months – and that has never happened before. This means that any outcomes related to the above factors are likely to result in some decisive rotation throughout the market, perhaps leading to periods of higher volatility and some irrational trading days.
Nevertheless, with a disciplined approach and the courage to look beyond the short-term noise in search of long-term returns, investors are likely to capture further upside potential over and above what we have already seen in the markets over the past two months.
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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