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Weekly comment: 11.11.19

Market update – Alan McIntosh, Chief Investment Strategist

Global stock markets continued to march to a slightly faster drumbeat last week, with the US market posting a series of new all-time highs. Tensions between the US and China appeared to be mellowing with commentary suggesting that both nations were looking to roll back tariffs on traded goods. Despite President Trump’s best efforts to downplay this on Friday, markets definitely caught a whiff of compromise.

Elsewhere, more governments are talking about using historically low interest rates to borrow for long-term infrastructure spending (as opposed to using borrowed funds to pay for non-productive expenditure). This would appear to be the mission statement of the UK Conservative and Labour parties as they embark on the general election campaign, with each trying to outdo the other in terms of spending pledges. While borrowing to spend inevitably adds to the total stock of debt, the argument put forward would be that if you improve the productive potential of the economy through sensible investment, you raise the growth and tax revenue potential as well. This has some resonance in Germany, where they have run a budget surplus for the last five years.

Saturday was the thirtieth anniversary of the Berlin Wall coming down. Despite the initially high economic costs of unification, (particularly the one for one exchange rate of East and West German currency) the political outcome has been a success, giving democracy and the rule of law to a country once under the yoke of oppression. It is events like this that help to explain the sometimes puzzling sense of unity that the EU often displays. This has been most evident with the perennial negotiations surrounding the UK Withdrawal Agreement from the EU, where 27 countries have ratified a deal, but UK political parties have struggled to do the same –a product of different historical experiences and motivations perhaps.

Economic update – Richard Carter, Head of Fixed Interest Research

Economic sentiment turned more positive last week on the back of optimistic headlines about US-China trade. According to some officials, a partial rollback of tariffs is being considered as part of the talks although Donald Trump said he is yet to agree to this idea. We are due to hear more from the US President on Tuesday when he speaks to the New York Economic Club, but for now the outlook is improving and this has pushed up bond yields and re-steepened the Treasury yield curve.

In the UK, the economy avoided slipping into recession in the third quarter with growth of 0.3% on the quarter. However, the latest data for manufacturing and trade suggests a complete lack of momentum as we head towards the end of the year and the current political merry-go-round is unlikely to help. In fact, Moody’s downgraded the UK’s credit rating outlook at the end of last week citing policy paralysis and a decline in fiscal discipline. The election campaign has so far been an unedifying spectacle with both sides spraying around spending promises with little regard to the impact on the public finances.

Looking ahead this week, US retail sales are released and we will find out if Germany managed to avoid a recession in the past three months. Jerome Powell will also speak to Congress, although markets currently see the Fed on hold until next spring.

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