In the last three months of the year, weak economic data has been offset by lower interest rates from the Federal Reserve, renewed asset purchases from the European Central Bank and the prospect of a 'phase one' US-China trade deal. In the UK, the election result brought some clarity to the outlook for Brexit. As a result, equity markets moved higher with stronger momentum causing many stock indices to close 2019 near to their all-time highs. Whilst trade and central bank policy has driven global markets, the big news in the UK was the election result, with Boris Johnson securing an 80-seat majority. This victory will allow the Prime Minister to push through his Brexit bill without concerns about defections or the DUP. In addition, Johnson will now occupy a stronger position when entering into trade negotiations than his predecessors, with the numbers in Parliament stacked in his favour. Since the initial Brexit vote, international investors have shunned the UK market, which has since traded cheap relative to other developed markets. However, following the election, there are signs of renewed international interest in the UK market and the discount to other stock markets has narrowed. The pound has been a barometer, measuring swings in sentiment. The currency rallied sharply on the recent election result but has subsequently retreated as Boris pledged not to extend the transition period beyond 2020. The possibility that a trade deal will not be successfully negotiated in the time available has caused concern for investors.
President Trump’s trade policy, and the resulting tariffs, has slowed international activity, particularly constraining the manufacturing sector of the global economy. The Manufacturing Purchasing Managers Indices in both Germany and the US are below 50, indicating that the sector is contracting. In December, it appeared a 'phase one' trade deal was agreed and an extension of US tariffs on Chinese goods did not materialise. Details have yet to emerge and the extent of this first move and progress on further trade talks will be important. President Trump announced that he will sign the agreement in mid-January so we eagerly await further detail.
The Federal Reserve has been under pressure from Trump to drastically reduce interest rates. Despite lowering interest rates in response to the weaker economic data, it has not acted to nearly the extent the President demanded and is likely to remain cautious. We believe that further rate cuts may depend on economic conditions, rather than political pressure.
Whilst the last quarter has seen a firmer tone for risk assets, many of the uncertainties that have plagued markets may return in the new year. Trade is the key factor for 2020 and this will depend heavily on politicians. Trump's impeachment, and subsequent trial, may prove a distraction but it looks likely that the Senate will divide on party lines and he will see off this challenge. With the US presidential election later this year, a strong economy may benefit his chances of re-election, thus increasing his motivation of coming to an initial agreement with China.
In the year to come, trade negotiations on both sides of the Atlantic are likely to remain key to the global economic outlook. As developments unfold, this will no doubt add to market volatility, however investors should continue to look through this for longer-term value. With interest rates likely to remain low for a long period of time, equities continue to offer attractive returns relative to bonds.
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