February Market Overview
Trade Talks Reach Pivotal Point
February is likely to be a crucial month for markets and could determine global growth for the rest of 2019. US/China trade talks are still being debated and the deadline for a potential deal needs to be struck by 2nd March or else we could see a re-escalation of the trade war. There have been suggestions that progress has been achieved and we expect face to face meetings to intensify as we move closer to the deadline.
Meanwhile, the US Central Bank hinted that they would be more patient when considering interest rate hikes, giving some respite to equity markets.
The UK’s future relationship with the European Union (EU) is still uncertain as the Government attempts to renegotiate the ‘Irish Backstop’ within the withdrawal agreement. The deadline for the UK’s exit from the EU is approaching the climactic date of 29th March.
Market sentiment has been concerned mainly with the potential slowdown of global growth and the path the Federal Reserve is likely to take in terms of their monetary policy. The former has been linked to weakening economic data in China and worries over how the trade war has affected supply and demand in the two largest world economies. Most recently, Donald Trump has tweeted that the trade “meetings were going well with good intent and spirit on both sides”. However, he stated that a deal would not be reached until President Trump and Xi Jinping have met face to face “to discuss and agree on some of the longstanding and more difficult points”. This meeting between the two most powerful world leaders will be crucial and will be closely watched by investors. A positive outcome should provide some stability for markets.
We still believe that both nations are beginning to realise that a world based on tariffs and restrictive trade agreements is harming global growth and the damage to the economy will have a negative effect on the domestic public perception of President Trump and President Xi. US businesses have already lobbied President Trump to put aside his differences with China, indicating that higher tariffs are causing higher costs for American manufacturers – which would lead to price inflation for the US consumer. Trump is already looking at his strategy to be re-elected in 2020 and has stated on many occasions that he wants his presidency to be measured by strong economic performance and stockmarket success. The ninety-day truce, agreed in the post-G20 meeting in Buenos Aires, ends on 1st March and we are hopeful that a deal can be arranged by this deadline.
In late January, the Federal Reserve provided a statement on their future outlook on interest rate hikes and the unwinding of their balance sheet. There has been much speculation concerning the Federal Reserve’s monetary policy path and, in October last year, the Fed’s comments suggesting that they were far away from ‘neutral’ in terms of rate hikes was one of the key triggers of the equity selloff. President Trump has argued that the central bank is countering the positive stimulus he implemented via his tax reforms as the Fed has continually increased the cost of borrowing for corporates. Jay Powell, the current Chair of the Federal Reserve, is navigating a delicate path as he is having to balance a strong domestic economy against warnings of slowing growth overseas and pressures on equity markets. In the January statement, the Federal Reserve’s tone was a stark contrast to previous comments in October. The central bank has put further interest rate rises on hold, citing tepid inflation and rising risks to global economic growth. In addition, Jay Powell stated that he was willing to take the balance sheet reduction off autopilot and to now take consideration of global economic conditions. This has eased some of the woes of corporations who were concerned that the central bank could potentially overtighten and trigger a recession.
The UK is scheduled to leave the European Union (EU) on 29th March and the withdrawal agreement negotiated by the Government has been vehemently rejected. Instead, Parliament put forward an amendment to urge the Government to renegotiate the controversial ‘Irish Backstop’. Consequently, Theresa May has been forced to listen to the concerns of Parliament by going back to the European Union to agree concessions. The EU have already stated that the ‘Irish Backstop’ is the only realistic solution to halting an Irish hard border and therefore their position is unmovable. If this current impasse continues the default position is for the UK to leave in March with no deal unless the government seeks to extend the Article 50 negotiating process, or Parliament intervenes to prevent a no deal.
The Italian economy fell into a technical recession in the final quarter of 2018 after the third largest eurozone economy had to cope with an abrupt increase in government borrowing costs and political uncertainty driven by Rome’s populist government’s stand-off with Brussels over its budget plans. Official data highlighted that Italian gross domestic product (GDP) fell by 0.2% in the fourth quarter of 2018, following an 0.1% drop in the third quarter. The contraction was worse than expected with most economists predicting of a 0.1% contraction. Italy’s National Institute of Statistics stated this recession was a result of a fall in the agricultural, forestry and fishing sectors, as well as a deceleration in industrial activity and services. Giuseppe Conte, Italy’s prime minister, has already recognised that he expected a recession, but stated that his government’s expansive fiscal policies would assist the country back to growth. Italy’s faltering economy will add more substance to the assumption that global growth is currently under pressure.
Mario Draghi, the President of the European Central Bank, has acknowledged that he expects slower growth within the Eurozone as data from this region becomes weaker. Protectionism, weakness in emerging markets and equity market volatility are all pointing towards the balance of risks leaning towards the downside. In addition, last month the poll of purchasing managers, a key gauge of business activity, fell to its lowest levels since the eurozone debt crisis. The European Central Bank has stopped quantitative easing, though Draghi has stated that significant monetary policy is still required to support the Eurozone economy.
Despite discussions between President Xi and President Trump, the effects of the trade war are rumbling on and detrimentally affecting investor sentiment in the region. China’s GDP dropped to its slowest annual rate in nearly three decades which highlighted how the trade war has dampened the economy and investor sentiment. Weaker economic growth has prompted the Chinese government to initiate a series of stimulus measures, as well as discussions around potential tax cuts. These measures could help boost the economy and alleviate the effect of the tariffs. However, we believe that the most viable solution is for China to agree a deal with the US to remove the tariffs and restrictive trade barriers with the largest world economy.
The outcome of trade talks this month is likely to be integral to global growth and investor sentiment in 2019. The more conciliatory tone in the latest US and China trade war discussions is good news for investors and we are hopeful that this can be resolved by the time the ninety-day deadline is reached. The most positive news has come from the US, where tax cuts, government spending and business confidence are supporting employment and investment, suggesting solid growth into this year. The UK market continues to look uncertain until the Brexit ambiguity has been resolved. This has resulted in reduced investment flows. We will continue to favour fund managers that have a flexible, active approach, with a global remit, so they can asset allocate across the entire investment world (as we believe diversification is key). However, most importantly we will endeavour, on your behalf, to identify fund managers that invest in underleveraged companies with strong balance sheets as we believe that highly indebted companies will be punished in 2019, if there are any unexpected events.