Monthly Market Outlook February 2018/March 2018Monthly Market Outlook Article
After the global selloff at the end of January, equity markets have recovered fairly well. This has been most noticeable in the US where the big tech stocks have led the bounce back, with the Nasdaq Composite index making an all time high in the past week. Market volatility was largely absent last year and whilst we remain positive on the prospects for global equity markets, we expect to see more periods of heightened volatility in the year to come.
In the US, it has been a characteristically controversial few weeks for President Trump. At the start of March, he finally followed through on his protectionist rhetoric and announced a 25% tariff on steel and a 10% tariff on aluminium. Reaction around the world has been predictably averse and many fear the beginning of a global trade war, which is in nobody's best interest. China may take retaliatory action on US agricultural products but has done nothing so far. As a big buyer of US debt, and at a time when US treasury issuance is growing, it may well prove unwise for the US to antagonise one of the biggest holders. Following disputes on the tariff imposition and other policies, Gary Cohn resigned as head of the National Economic Council and Trump fired Secretary of State, Rex Tillerson. To top things off, voters in Pennsylvania elected a Democrat over a Republican candidate in a district that Trump had won comfortably in the 2016 election. This vote was seen by many as a referendum on Trump's presidency and may suggest that the President's popularity amongst his supporters is waning. However, beyond the current White House disarray, the US economy appears robust. Economic survey data is consistent with annual GDP growth of around 4%, corporate earnings are solid and the labour market continues to strengthen. Fiscal spending and tax cuts are adding to the momentum. The only amber light preventing accelerated policy tightening continues to be meagre wage growth. Against this backdrop, new Federal Reserve ("Fed") Chair Jerome Powell has hinted at the possibility of four interest rate hikes in 2018 as opposed to the previously indicated three. A March hike by the central bank is fully priced into markets.
In the UK, Brexit negotiations remain shrouded in uncertainty. Theresa May's Brexit speech at the start of the month was criticised for a lack of detail beyond repeating the five red lines her government will not cross. Jean-Claude Juncker has warned that greater clarity is required from the UK government, especially on the Irish border issue, which continues to stall talks. May's current situation has not been aided by escalating tensions with Putin following the poisoning of an ex-Russian spy living in the UK as part of a spy swap in 2010.
In Europe, the European Central Bank ("ECB") voted unanimously to remove the language indicating that asset purchases could increase in size and/or duration if needed. The change of wording is another small step towards removing the support the ECB has been providing to markets. Germany finally has a government after the longest period of coalition negotiations in their post-war history. Angela Merkel has been sworn in for a fourth term as Chancellor after almost six months without a government, which should provide a relief to markets. The remaining concern lies in Italy, where the election resulted in no party gaining power. The anti-EU Five Star Movement won the highest proportion of the vote and a coalition government will have to be formed. People are now trying to guess what the possible coalitions could be. Recent rhetoric appears to be that a coalition between Five Star and the Eurosceptic League party could be possible, which raises the concerning prospect of two radical groups running the country. We will continue to monitor these events closely and it serves as a timely reminder that the wave of populism is not dead