Chief Investment Strategist
Last week we talked about three wishes for Christmas. What factors might lead to a recovery in equity markets after six or seven weeks of falling share prices? The first wish was the US Fed would modify its interest rate forecasts in the light of weaker economic data. Last week, Fed Chairman Jay Powell gave such a broad hint. In a speech to the Economic Club of New York he suggested that US interest rates were just below neutral ( a bit of a U-turn from his early October comment that rates were a long way from neutral). He also commented that policy decisions would be made on developing economic and financial conditions. Bond yields fell and US stocks had their best week in seven years.
The second wish was that trade tensions between the US and China would ease to avoid fresh tariff increases on US imports of Chinese exports, due to take effect on January 1. Last night (Sunday) Trump agreed to postpone the tariff increases by 90 days to allow talks on a trade compromise to continue. This led to a sharp rally in Asian markets this morning and pushed equities higher in Europe today.
The third wish, that the Brexit Withdrawal Agreement is ratified by parliament on the first or second vote, is looking more troublesome. Parliament will vote on December 11 and at the moment the arithmetic does not look in favour of this being passed. However, a week is a long time in politics, as the old saying goes, so there is much that may happen between now and then. Last week’s publication by the Government and the Bank of England of a number of economic scenarios relating to Brexit (mostly negative), kept the UK stockmarket from participating in the more bullish feeling emanating from the US. This morning, however, the mood is brighter, in the light of the more positive tone to the Sino-US trade talks.
Two out of three ain’t bad. We just need to wait a bit longer to see if the third wish comes true.
Investors have welcomed the temporary ceasefire in the trade war agreed by the US and China at the G20 summit. President Trump has predictably lauded the agreement but the details are typically sketchy and a proper game-changing deal will require major compromises on both sides. One can’t help but feel that Trump needs the success to offset his domestic political troubles but the Chinese can continue to play the long-game, unencumbered with the nuisance of the democratic cycle.
In the meantime, global economic data continues to slow and last week the Chinese manufacturing PMI fell to the crucial 50 level suggesting no growth while jobless claims in the US also hit a 6 month-high. This moderation has obviously got the attention of the Fed, with Chairman Powell saying that interest rates are now close to a neutral level and that further moves will be more data-dependent going forward. A rate hike still looks like a done deal for December but markets now only expect 1-2 rises next year.
In the UK, the Brexit debate in Parliament gets going this week ahead of the vote on the 11 December. It looks highly likely that Theresa May will lose the vote by some margin so the crucial question is what happens next. Events will probably unfold rapidly but she may well face a vote of no confidence from her own party and a vote of no confidence in the government as a whole as Labour attempts to precipitate a general election. It was interesting to see the latest UK manufacturing PMI this morning – it actually rose by more than expected to 53.1 but part of this bounce was apparently due to stockpiling ahead of a possible no deal with companies concerned about their supply chain.
This week will see the release of the US ISM and nonfarm payrolls while OPEC also meets in Vienna.