Market Overview March 2020
The UK’s divorce from the EU is still front and centre, moving now from the process of leaving the bloc, to negotiating a trade deal with it. Rhetoric from both sides has been rather extreme, with both taking a hard stance on initial negotiating positions. The EU, driven even further by France, has stated it expects strong regulatory alignment, continued access to UK fishing waters on existing terms, and final arbitration by the ECJ on any and all disputes between the two sides. The UK has stated regaining total sovereignty is more important than any trade deal, and so outright rejects EU demands, the so-called level playing field seemingly unimaginable to those leading the negotiations for the UK.
With an 80-seat majority in the house of commons, Boris Johnson is unlikely to face the same troubles that plagued Theresa May’s tenure, namely rebellious MPs from her own backbenches tying the government’s hands in negotiations and forcing through their own agendas. If Boris Johnson is serious about walking away from talks – and all evidence so far is that this is the case – then EU negotiators are underestimating the threat of a no deal situation come the end of the transition period.
Separately, a spate of positive UK economic data has given further weight behind the ‘Boris-bounce’, as the UK economy picks up following the uncertainty over the December election. Employment continues to rise, recording the lowest unemployment level in history, and retail sales bouncing back after the lull towards the end of 2019.
The European economy and particularly that of the eurozone, have struggled recently with Italy, Spain, France and now even Germany showing signs of slowing growth and nearing a recession. This has weighed on European markets and the euro, the latter suffering significantly. Italian manufacturing data slumped for a 17th consecutive month, adding to signs that the outbreak of coronavirus is set to plunge the eurozone’s third-biggest economy into another recession. Similarly, French PMIs fell by 1.3 points to 49.8. Eurozone prices rose at their slowest rate for three months.
Political tensions in Germany have certainly not helped over the past month. Angela Merkel has struggled to keep her party and coalition together. The longest serving political leader in the eurozone has had trouble appointing a successor after her heir-apparent suddenly resigned. The key battle for Merkel has been keeping the ambitious Friedrich Merz from power in favour of a more moderate replacement. The German political situation will be closely watched by markets as Europe’s largest economy becomes the centrepiece of a struggling region.
Europe’s basket case, Italy, has also suffered from the coronavirus outbreak, with its Northern region (the most economically active) all but shut down. We will begin to see the impact of this as continuing market data comes out in March.
The US economy continues to be a staple for the rest of the world. Data is watched closely for signs of a slowdown that would inevitably seep through to the rest of the developed market economies. The Federal Reserve maintains that it will not overreact to coronavirus fears and that it will act only once evidence supports more stimulus. As at the time of writing however (3rd March) the Fed has cut interest rates by 50 basis points, sending markets sharply higher. Consumer confidence rose to a six-month high, but frightening images from abroad should weigh against a historically strong labour market in coming weeks. Personal income rose 0.6% in January while personal spending rose 0.2%. New home sales set a cycle high, and housing should continue to strengthen, with mortgages rates at record lows and likely to stay there, particularly if the bond market’s forecast of lower rates pans out.
The impeachment trial pf President Donald Trump went as expected, with the House acquitting him on all charges by 52-48. The votes were sharply divided along party lines. Mitt Romney became the first senator in history from an impeached president’s party to vote to convict, voting ‘guilty’ on the first count. As expected however, markets largely ignored the trial as the vote was considered more of a sideshow, which it proved to be.
The Democratic presidential nomination continues to take centre stage in the US with Bernie Sanders catching the initial momentum and looking the one to beat. As other more politically centred candidates begin to drop out of the race it is expected that support will fall behind former Vice President Joe Biden, who is not viewed as negatively by market participants.
[endif]--Chinese economic activity took a massive hit in February due to the coronavirus outbreak, with PMIs coming in at the lowest ever recorded at 35.7. Given that commentators generally expect some manipulation of the data buy the Chinese authorities, this number took the market by surprise. The economic impact will continue into the following months, though the Chinese stock markets seem to have discounted this entirely by fully recovering losses for the year. One positive to take from this is that the apparent shutdown of an entire province seems to have had a notable impact on harmful pollutants. Satellite data shows the air over China to be it’s cleanest for several decades.
Seemingly the hardest hit from the virus outbreak, Japan continues to suffer economically. The rather drastic measure of shutting all schools was taken in an attempt to stop the spread of coronavirus. Critics of this move have said it is politically motivated to protect the Tokyo Olympics. The Japanese economy has looked rocky for some time even before this. Prime minister Shinzo Abe’s economic policies, commonly referred to as ‘Abenomics’, is being increasingly scrutinised. Gross Domestic Product fell at an annualised rate of 6.3% in the final quarter of 2019, and most analysts are forecasting a recession (technically defined as two consecutive quarters of declining economic output) is all but certain. Worryingly this is as Japanese monetary policy is about the loosest in the developed world.
Please note: The opinions expressed in this update are those of A&J Wealth Management Limited only, as at the 1st of March 2020 and are subject to change. The update is for information purposes only. Source: Financial Times.