Market overview: Alan McIntosh, Chief Investment Strategist
The victory for Boris Johnson and the UK Conservative Party was largely anticipated by markets (sterling made most of its upward move weeks before the election) but the scale of the win was not. A rally in domestic-focused shares such as utilities, financials and housebuilders on Friday largely reflected the reduced political risk over the next few years resulting from such a commanding majority.
With the Withdrawal Agreement from the EU expected to be ratified in the coming weeks, the market will now focus attention on the next phase – negotiating a future trade agreement with our European colleagues. This is against a background of flat economic activity in the UK. Some of the discount in the UK stock market versus other global markets has narrowed in the last six weeks or so. It now remains to be seen whether UK equities as a whole look more attractive to foreign investors, given the balance between greater political certainty on the one hand, and little clarity on our trading status with the rest of the world on the other.
The weekend also saw progress made in the seemingly never-ending trade discussions between the US and China. A partial rollback of existing tariffs and the postponement of new tariffs on imported Chinese goods was perhaps not the best outcome markets were hoping for, but it is a step in the right direction. Elsewhere, the Federal Reserve indicated that interest rates would be on hold for the next year. When you contrast all of this with the period twelve months ago (when interest rates in the US seemed on a relentless march upwards) markets are in better shape and volatility has moderated again. All of this points to a much calmer run into the year end after a very strong rise in shares during 2019.
Economic overview: Richard Carter, Head of Fixed Interest
The US and China have agreed a ‘phase one’ trade deal which should be signed by both sides in early January. This has averted another round of increased tariffs which is good news for the global economy but it looks like much of the thornier issues have been left for ‘phase two’. There has also only been a partial rollback of existing tariffs – there remains a 25% levy on goods worth $250bn and a 7.5% tariff on goods of $120bn. We expect trade tensions and the threat of protectionism to linger on.
The latest data has been rather mixed but at least the news out of China improved with better than expected industrial production and retail sales numbers. However, hopes for a continued bottoming out of eurozone data have been dashed after the German and French manufacturing PMIs both fell.
On the political front, we may see a few ministerial appointments from Boris Johnson this week but a wider cabinet reshuffle is not expected until after the UK has left the EU. The Withdrawal Bill is likely to come back to the House of Commons this week after the Queen’s Speech while we may also learn who the next Bank of England governor is going to be. Elsewhere, Donald Trump may well be impeached in the coming days, which sounds like it should be a momentous and historical event but is likely to be shrugged off by the market, especially as he will probably be cleared in the Senate.