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Monthly Market Outlook August/September 2019

Monthly Market Outlook Article

At the start of August we saw equity markets fall as protests in Hong Kong increased tensions between China and the West. These issues have since abated as Hong Kong Chief Executive Carrie Lam formally withdrew the extradition bill, and markets stabilised as the month progressed. US equity markets have since recovered and are once again within touching distance of their all-time highs.

Somewhat at odds with the narrative being depicted by equity markets, global economic data has continued to disappoint, particularly in manufacturing. Purchasing Managers’ surveys indicated that global manufacturing has continued to contract. German manufacturing activity hit a seven-year low, undergoing one of its most marked contractions since 2009, potentially pushing it into recession. On the other hand, consumer confidence in the US has been resilient in the face of the US-China trade conflict and the continuous commentary emanating from Trump's twitter account.

In the UK, Boris Johnson moved to prorogue Parliament between mid-September and the 14th of October. This decision was met with backlash, and is being challenged in court, with the final judgement yet to be made by the UK Supreme Court. Scotland's First Minister, Nicola Sturgeon, accused Boris Johnson of acting as a "tin-pot dictator". For now, further parliamentary debate on Brexit has been stymied. In an effort to avoid a no deal, Parliament passed the “Benn-Burt bill”, effectively forcing the Prime Minister to seek an extension by the 19th October unless a deal has been agreed, much to Johnson's chagrin. Indeed, Johnson said he would rather “die in a ditch” than ask for a Brexit extension. Clearly, the impact of Brexit on UK assets is not going away anytime soon.

At a recent speech, Bank of England (BoE) Governor, Mark Carney, commented that sterling volatility is at "emerging market levels", and likened the currency to a "barometer" for the UK's exit from the European Union. The BoE continues to admit that the impact of Brexit remains a challenge to forecast, and hence is unlikely to take any action this month. The outcome is as unclear as ever, with a deal, no-deal, further delays, a second referendum and a general election all possible before the end of the year. Even another leadership challenge within the Tory party remains a possibility. We continue to be mired in the fog of Brexit.

Investors are looking ahead to a number of key central bank meetings over September. The European Central Bank (ECB) announced a new stimulus package at its meeting last week, including a rate cut from -0.4% to -0.5% and the relaunch of Quantitative Easing (QE). Following the ECB, investors expect the Federal Reserve (Fed) to deliver another 25 basis-point rate cut.

Whilst we continue to have a positive outlook for equities over the long-term, we acknowledge the increasing short-term risks of a pronounced slowdown which would likely result in heightened volatility. Equities continue to look attractive relative to bonds and will benefit should there be progress on a trade deal. However, in the short-term, concerns about global growth may increase equity market volatility.

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