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Looking through the Brexit noise, what has been pushing markets higher?

05 April 2019

While Brexit dominates the domestic headlines, the movement in financial markets has been driven by changes in central bank policy and eased fears of a slowdown in economic growth.  In the last quarter of 2018, it was feared that central banks, particularly the US Federal Reserve (Fed), were tightening monetary conditions too fast. This, together with the US-China trade dispute, was threatening to slow global economic growth. While there have been signs of some slower growth, central banks and the China authorities have moved to counter this. Despite some problems remaining, there appears to be some progress concerning US-China trade talks. 

The Fed no longer forecasts further rate rises this year and has announced that it will end its balance sheet reduction by September 2019. Prior to this, the European Central Bank has announced another round of cheap loans to banks.  As central banks have pulled back from tightening, we have seen government bonds generate positive returns and credit spreads narrowing. In response to weaker growth expectations, China has announced a stimulus package of tax cuts and additional spending.  On trade, there has been sufficient progress with talks for President Trump to postpone the additional tariffs that had been initially proposed. It is possible that a meeting between Presidents Trump and Xi could take place before the end of April to conclude a trade deal.  This has lifted equity market sentiment and the falls in indices in the final quarter of last year have largely reversed. Given the improved prospects for global growth, commodities also showed positive returns.

While global markets have largely ignored Brexit, UK investors remain fixated by the goings on in Westminster and Brussels.  The value of the pound dipped on the prospect of a no-deal Brexit, but subsequently recovered when this seemed less likely.  There has been a corresponding move within the UK equity market, with international stocks outperforming domestic stocks when the pound is weak and vice versa. Writing about Brexit is increasingly difficult as the prospects swing by the hour and the political pundits comment on each change in strategy.  At the end of the quarter, following many votes in Parliament, we can be sure that MPs do not want a no-deal Brexit.  However, a no-deal Brexit remains the legal default position until something passes in Parliament.  Having so far rejected all other propositions, what they do want is not clear.  There has already been one delay in the Brexit date and further delays are possible. 

In spite of Brexit being the primary concern of UK politicians and Eurocrats in the first quarter, markets have focused on the good news.  We expect that the US will eventually conclude a trade deal with China and the Fed will only move to tighten again if economic growth improves substantially.  We therefore remain broadly positive on equity markets for the quarter ahead.

 

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