Monthly Market Outlook October/November 2019Monthly Market Outlook Article
Global financial markets have adopted a more positive tone in recent weeks, with equity markets hitting new highs and government bond yields rising. There is some tentative evidence that the contractionary forces that have hit the world economy over the past year are beginning to abate. The threats from Brexit and Donald Trump’s tariffs against China appear to have eased moderately.
Credit agency Moody’s lowered the UK’s credit outlook to negative, blaming Brexit for “paralysis in policy-making”. The deal that Boris Johnson has negotiated appears to have reduced the imminent risk of a no deal scenario, but if a trade agreement is not forthcoming, in the end, this cannot be entirely ruled out. The election on the 12th December may provide us with greater clarity; however, electoral pacts and tactical voting in a first-past-the-post system can distort the result, making National Opinion polls particularly unhelpful for predicting the outcome.
A Labour government, even in a coalition, is expected to have a negative impact on sterling and the UK market because of potential further delays to Brexit, threats of nationalisation and increases in taxes. Whilst the Brexit Party has stood aside in Tory seats, they may still distort the results, particularly in Labour marginals targeted by the Conservatives. At present, we are reluctant to suggest that any outcome is more likely than another. However, what can be said with some confidence from the campaign so far, is that government spending and borrowing will rise. This would increase the supply of gilts, potentially resulting in higher borrowing costs for the government.
As expected, at the Monetary Policy Committee (MPC) meeting, the Bank of England (BoE) held rates and kept its balance sheet unchanged. However, two members of the MPC voted for a rate cut in reaction to the weakness of the economy. The BoE's expectation is for a gradual rate increase, but cannot rule out the likelihood of a rate cut if needed.
Other major central banks have continued to ease monetary conditions. The Federal Reserve (Fed) cut rates for the third time this year in light of below target inflation and a bleak environment for global manufacturing. This is despite the consumer holding up thus far and unemployment remaining at historically low levels. Mario Draghi held his last press conference as President of the European Central Bank (ECB), handing over the reins to Christine Lagarde. At the same time, the ECB has now restarted its asset purchase programme at a pace of €20bn per month. Whilst monetary conditions have eased once again, the scale of the easing thus far has been much more modest compared to previous cycles.
There are some similarities between what is happening now and the inflection point in the world economy in 2016. Resolution of the trade dispute with China may be the key to a return to global growth. US and Chinese officials had indicated that both sides had reached a deal to reduce some tariffs to secure a “phase one” deal; but just as the situation started to improve, Trump cautioned that he had not yet approved the deal. It seems likely that we are to remain mired in a fog of trade politics for some time to come. While uncertainty remains high, we caution against reacting strongly to short-term noise.