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WeekWatch (11/11/2019)

WeekWatch (11/11/2019)

“Deal or no deal?” was the question on investors’ minds this week, as they waited for confirmation that two leaders had finally agreed a way out of the deadlock that has weighed on the global economy for nearly 18 months.

Brexit? No. These days, all eyes are on the US and China.

Hopes were quashed on Friday morning when President Trump denied agreeing to reverse $112 billion of import tariffs in ‘phase one’ of a trade deal with China. The president played hard to get, saying he was ‘keen’ to make a deal, but that China needed it more than the US.

Investors rode the wave of optimism that followed earlier rumours of a deal, sending Wall Street’s three main equity gauges to record highs. Money rushed into equity funds at its fastest rate in almost two years, with the FTSE All World index back near its 2018 record. With stocks rallying and bonds cooling off, the mood music appeared to be changing.

Synchronised easing of monetary policy from central banks around the world – which has increased the likelihood of an enduring period of low interest rates – is helping solidify investors’ appetite for risk. Stimulus measures and progress in the trade war appear to be boosting confidence in equity markets, for now.

Japan announced its own stimulus package on Friday; the first in over three years. Shinzo Abe, the prime minister, explained the move was necessary following natural disasters and the continuing financial hit from the Tokyo Olympics. While Toyota bucked the headwinds slowing the global car industry, posting record profits on Thursday, SoftBank, the country’s biggest tech investor, had another difficult week. The collapse of WeWork has pushed the bank to a $6.4bn quarterly loss – which is likely to frustrate Saudi Arabia; Riyadh committed $45bn to the bank’s Vision Fund.

OPEC also cast a long shadow over Saudi Arabia this week, as it downwardly revised its forecast for global oil demand over both the medium and long-term, citing tough market conditions and “signs of stress” in the world economy. This may prove problematic for Saudi Aramco, whose upcoming IPO depends on investor confidence in oil profitability.

On Thursday, the European Commission downgraded its growth forecast for the Euro area to 1.1%, saying they anticipate global trade tensions will limit further expansion. While hopes of a US-China trade deal saw European markets hit a four-year high, the region is still battling significant headwinds. With the future trade relationship between the UK and the EU still undetermined, and the US threatening to introduce tariffs of 25% on cars, fears over economic conditions are growing. With German manufacturing hovering near a seven-year low, tariffs on its car exports may tip the country into recession. The Commission’s forecast for the UK was upgraded to 1.4%.

In contrast, the Bank of England turned dovish this week, keeping interest rates on hold at 0.75% and downgrading growth forecasts for the year. “If global growth fails to stabilise or if Brexit uncertainties remain entrenched, monetary policy might need to reinforce the expected recovery in UK GDP growth and inflation,” said Mark Carney, the Bank’s governor, giving a clear sign that the rate-setting committee is prepared to cut rates further if the economy slows. With two committee members voting to cut rates – the first split in over a year – the next six months will be decisive.

The Bank’s decision came as the UK’s two main political parties announced their spending pledges, kicking off the general election campaign. Both parties drew criticism for abandoning targets to reduce national debt through a ‘binge in borrowing’, with the Conservatives pledging £20bn a year over a five year period, and Labour promising £250bn in infrastructure investment over the next ten years. One thing is certain: the winner will have the difficult job of ensuring the economy continues to grow, and picks up beyond the 0.3% growth achieved in the third quarter.

High street brands had another gloomy week, as Mothercare and Mamas and Papas entered administration, putting over 2,500 jobs at risk. M&S and Sainsbury’s reported further losses despite store closures and cost-cutting measures. Flat data for the service sector led analysts to say it was looking ‘lifeless’, while the construction sector is in its deepest downturn for a decade. Things are looking sweeter for Tate & Lyle, whose share price jumped 7% after profits for the first half of the year rose 45%.

While the tide may be about to shift in the trade war, headwinds mean the waters may well remain choppy for investors and savers alike. “The evidence suggests that the global slowdown we’re experiencing is temporary and will not end in recession,” says Michael Joynson, Head of Market Insights at Invesco Asset Management. “Uncertainties remain like trade, Brexit, and geopolitics – but monetary policy stimulus, alongside expectations for some additional fiscal easing, suggest a more favourable outlook for 2020. That is certainly what equity markets are currently discounting.”

Invesco is a fund manager for St. James’s Place.

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