Market and Economic Update – 14/01/2019
Market update from Raiz CEO, George Lucas
US-China trade deal hopes lift global stocks
This week saw equity prices recover across the board. In local currency terms, MSCI’s USA Index rose by roughly 5 per cent, its World ex USA Index ticked up by 3 per cent, and its Emerging Markets Index lifted by 2 per cent. This is a big change from the prior three months when the indices fell by about 16 per cent, 13 per cent and 8 per cent, respectively.
The recovery in stock markets was partly driven by the latest round of US-China trade talks and growing optimism there would be a deal struck. Expectations were low coming into the talks in Beijing, so the prospect of a deal buoyed sentiment. Equity prices could get a further boost if there is some positive announcement in the coming days.
‘Small’ bounce likely if trade deal struck
However, any such US-China deal would probably only give markets a small and temporary lift due to the limited influence on the markets of the trade war. While it is often used in the media to justify big moves in equity prices, its role has often been exaggerated in my view.
For example, when equity prices in emerging economies began to under-perform those in the US in June last year, this was widely attributed to US President Donald Trump’s decision to slap tariffs on Chinese imports. But the under-performance coincided with weaker economic data from China, which probably played as big a role in dragging down markets.
Why it’s starting to feel like 2016 again
In a similar vein, the latest recovery in markets probably has more to do with other developments like last Friday’s stronger-than-expected US jobs report and dovish comments from US Federal Reserve Chair Jerome Powell that investors read as signalling the Fed’s three-year tightening cycle is drawing to a close. Meanwhile, in China there was a further cut in the required reserve ratio and the announcement of more fiscal stimulus.
Some are drawing comparisons with the start of 2016, when stimulus in China and expectations that the Fed would delay further tightening helped fuel a recovery in stock markets around the world. But I am not sure this is the correct way to view it.
While there are some clear similarities with the first few months of 2016 I am not anticipating another rebound like the one that ran from early 2016 to 2018 and currently the backdrop globally is not conducive for strong stock market performance.
Key Brexit vote looms in UK
Turning to the UK, recent Brexit developments have created more uncertainty around whether Prime Minister Theresa May’s controversial deal will be ratified.
British lawmakers are set to vote on May’s much-maligned Brexit deal on Tuesday but I think whatever the outcome now markets will take it in their stride.
Given the wildly different possible Brexit outcomes, it’s best to focus on three scenarios: Brexit with May’s deal, probability has fallen to 25 per cent; Brexit with no deal, probability has risen to 25 per cent; and some form of “fudge and delay” involving an extension of Article 50, to probability of 50 per cent.
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