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Weekly Comment: 04.02.2019

Market Overview, Alan McIntosh

January proved to be a far happier month for markets, certainly compared with the closing weeks of 2018. Since the low of Christmas Eve, the US S&P 500 Index has risen by 15%. Other global equity markets have also recovered sharply. So why the change in sentiment? If we rewind to the beginning of last October, Jerome Powell, the Chair of US Federal Reserve, commented that we were a “long way” from neutral on interest rates. This spooked the markets into believing he was on a pre-ordained path to tighten monetary policy come what may and started the global sell-off in equites. In early December, when asked if the Fed might make adjustments to the speed of the central bank balance sheet reduction programme, effectively the reversing of quantitative easing, he remarked that it was on “auto-pilot.” This further destabilised markets.

Fast forward to the early days of January and we saw a remarkable change in guidance from Powell, when he said that the Fed would be “patient” in terms of potentially raising interest rates. This was due to current global economic uncertainties. Then last week, at the latest monthly central bank meeting, he indicated that interest rates were likely to be on hold for now, citing the same economic uncertainties as before, but also added that the Fed would be flexible on the pace of balance sheet reduction. This U-turn has seen investors’ risk appetite increase once more, hence the recovery in markets. Fears about the central bank potentially triggering a recession through overly aggressive tightening, have given way to a focus on another quarter of solid company earnings and a US economy that is still performing well. All we need now is a satisfactory resolution to the US – China trade dispute and a smooth path to Brexit!

Economic Overview, Richard Carter

Last week’s dovish Federal Reserve statement was warmly welcomed by both investors and Donald Trump who has subjected Jay Powell to a barrage of criticism in recent weeks. The Fed confirmed that they will be ‘patient’ as far as interest rate rises are concerned and also indicated some flexibility about their unwind of QE. This is despite the fact that US data remains pretty strong with yet another bumper payrolls number on Friday, as well as a healthy rebound in the ISM manufacturing index. US bond markets are now pricing in no rate hikes at all in 2019 and then possible rates cuts in 2020.

The economic weakness in China and Europe was clearly a factor in the Fed’s decision and there is little cause for optimism on that front. The Eurozone GDP only grew by 0.2% in Q4 and Italy entered the sixth recession since the birth of the Euro which helps to explain the appeal of non-traditional political parties there. At least there seems to be some progress on trade talks between the US and China, but the threat of additional tariffs remains until a deal is struck.

In the UK, Theresa May claims she will battle for Britain in Brussels although in reality seems to be battling her own MPs in Westminster while running down the clock until the next vote on her deal. Most of the talk at the weekend was about an impending extension to Article 50 and meanwhile the economic stagnation continues. The latest manufacturing PMI in the UK did hold above the 50 level but partly because stockpiling is at a record high while consumer confidence remains close to a 5-year low.

This week, various service sector PMIs are released around the world and the latest Bank of England meeting takes place on Thursday.

Investors should remember that the value of investments, and the income from them, can go down as well as up. Investors may not recover what they invest. Past performance is no guarantee of future results.

Any mention of a specific security should not be interpreted as a solicitation to buy or sell a specific security.

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