February 2020 Market Commentary
After three and a half years, two general elections and the most divisive referendum in memory, the UK has finally left the EU – at least formally – and is set to embark on what is shaping up to be a year of trade negotiations unprecedented in their perceived importance and short time-frame for success. For the time being, nothing will change. As part of the so-called ‘transition period’, the UK will continue to adhere to EU standards on everything ranging from the environment, to citizen’s rights, to food standards. The threat of a no-deal remains at the end of 2020, when the transition period comes to an end. The UK continues to talk-up the chance of reaching a far-reaching agreement by then, covering both physical goods and services. The EU however has consistently said this will be unachievable. Expect this uncertainty to weigh on markets over the coming year, particularly in the pound, where traders prefer to express their Brexit views.
In what was current Governor Mark Carney’s final meeting, the Bank of England held firm on interest rates, resisting the temptation to lower ahead of Brexit, though it did lower growth forecasts due to lackluster productivity. There was enough positive data to convince the BoE to stop short of a rate cut, though. With the base rate currently 75bps, the UK remains one of the few developed economics with at least some room to maneuver when it comes to monetary policy.
U.S. Secretary of State Mike Pompeo made encouraging comments on the potential for a trade deal getting done, continuing the line out of the U.S. that negotiating a deal with the UK is a top priority. It remains to be seen whether this enthusiasm is continued as talks progress, and contentious issues such as agricultural standards and pharmaceuticals are discussed. For the time being though, both sides appear positive that a deal can be reached.
With the phase-one trade deal signed, markets moved to focus on US monetary policy and economic strength. Recent data shows the US economy growing at the slowest annual pace since 2016, hit by lower consumer spending across almost all categories of goods, including and cars and furniture, although household spending on services was slightly better. Gross domestic product rose 2.3% for the full year 2019, down from 2.9% in 2018 and falling well short of Trump’s target of 3% annual growth. A further spook to markets occurred in the last week of January as once again, the US yield curve inverted. This is acknowledged as the most accurate recession predictor, and whilst the timing of a recession following inversion is hard to pin down, market participants will watch closely for any signs that the US employment outlook is worsening.
The Federal Reserve decided to leave interest rates unchanged in what was probably the most predictable meeting for some time. The Fed cut rates three times in 2019 but indicated then that it would likely leave its benchmark borrowing rate unchanged this year. The tone remains one of accommodation, and it is clear the Fed is prepared to step in to maintain the current expansion for as long as possible. Fed Chair Jay Powell confirmed open market operations in the form of injections into the repo market will continue at least for another month, probably longer, which the market is now beginning to accept as another form of quantitative easing, which will likely boost risk assets.
The farcical impeachment trial of Donald Trump was never likely to be anything other than a side-show, with the President set for acquittal as bids to call witnesses fail. The result of this trial was always a rather foregone conclusion, but it must be said that this process has hardly been positive for US politics, with a significant number of the President’s own colleagues in the Republican party required to side with the Democrats in order to convict him.
With Brexit finally happening, European leaders can start to focus on domestic issues ahead of crucial trade talks with the UK. Eurozone growth has slowed almost to a halt after the French and Italian economies shrank unexpectedly, denting hopes of a rebound and giving the European Central Bank a dilemma over whether to inject more stimulus this year. This is contrasted by the jobless rate sliding to a 12-year low, showing that the economy still has room to run, even as data suggests we are beginning to see a drop-off of economic activity. Tighter labour markets may push up wage growth, encouraging customers to spend more and companies to push prices higher. Unemployment in the eurozone peaked at 19.3m at the height of the eurozone debt crisis in 2013, falling steadily since then to reach 12.25m in December. Youth unemployment remains high at 15.3 per cent, but that is down from a peak of 23.9 per cent.
[endif]--Russia’s decision to close its more than 4,000km-long border with China to prevent further outbreak has sparked further trade worries and will further dampen European GDP.
The outbreak of the coronavirus and the declaration by the World Health Organisation that this is now an international threat have spooked markets, particularly those in Asia, which have been hit hard at a time when global growth is already on uneasy footing. Bloomberg is reporting that provinces accounting for over two thirds of Chinese GDP will remain keep businesses closed for the foreseeable, with the realisation that this is sure to have consequences for the Chinese economy beyond initial fears. With the (reported) death toll rising beyond 200, and the number of cases now exceeding 10,000, the spread appears not to be slowing, but increasing.
Japan’s government has nominated a dovish economist to the board of Bank of Japan in a signal that prime minister Abe is committed to a programme of massive monetary easing. The Japanese central bank has embarked on a quantitative easing experiment far beyond that of its counterparts, buying up domestic exchange-traded funds as well as government bonds – a move that the European Central Bank may soon adopt itself as it runs out of domestic bonds to purchase – and shows no signs of slowing this.
Please note: The opinions expressed in this update are those of A&J Wealth Management Limited only, as at 3rd February 2020 and are subject to change. The update is for information purposes only. Source: Financial Times.