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Monthly Market Outlook November/December 2019

Monthly Market Outlook Article

The UK election and the tentative phase one agreement between the US and China dominated market sentiment over the past month. Ultimately, Boris Johnson was able to secure a substantial majority in Parliament, achieving the Conservative Party's largest number of seats since 1987. The Party even took a string of past Labour decade-long strongholds, leaving the Labour and Liberal Democrat Parties seeking new leaders. The size of the win was more than almost anyone predicted, paving the way for Boris Johnson to ignore the more hard-liners in the Conservative Party. Boris Johnson described the result as a "powerful new mandate to get Brexit done", intending to complete a new trade deal with the EU by the end of 2020. After a sharp initial relief rally following the result, markets were subsequently surprised with Boris Johnson's intention to pass a bill ruling out any further extension beyond 2020. Whether this is a negotiating tactic or an actual hard-line stance remains to be seen. Labour's dismal performance has removed fears of re-nationalisation, which could boost investment while trade negotiations remain ongoing. Moving forward, the main driver of markets will be international trade, with a particular focus on US policy in relation to China.

President Trump is reported to have signed off the first phase of a trade deal with China, ratcheting down the trade war between the two nations. The US has offered to roll back a large portion of its existing tariffs on $120bn of Chinese goods from 15% to 7.5%, as well as retracting the threat of new tariffs on $156bn more Chinese consumer goods. The US has stated that in exchange, China has committed to purchase at least $40bn of US agricultural goods annually, to tighten protection on US intellectual property, and to ban the forced transfer of technology from US companies to Chinese domestic competitors. The deal is also said to contain commitments against competitive devaluations of the currency, and measures to improve access to its market for US financial services groups.

Whilst the deal with China does mark the most significant de-escalation of trade tensions between the two countries, it is far from the comprehensive pact that Trump promised. The US will still maintain 25% tariffs on around half of all Chinese imports, worth around $250bn, and China has been unwilling to make concessions in key areas, such as its use of industrial subsidies and cyber theft practices. US officials have suggested these thornier issues would be tackled at a later stage. Phase one of the deal is expected to be signed in early January and to take effect a month later. As we move into the new year, this will inevitably be one of the key areas of focus for investors.

Despite a clearer pathway forward on trade, we caution against reacting strongly to short-term noise as uncertainty remains high. Certainty, or as close to it as we can get, in the form of comprehensive deals agreed and signed by all parties involved, may still be some way off. Looking ahead, we still await the final details of the phase one agreement, Boris Johnson's policy priorities, and the US presidential election. For now, investors have been reacting to these developments in their stride, with many equity markets across the globe close to or hitting all-time highs, while government bond yields remained range bound.

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