Your Q3 2019 market commentary

Even by recent standards, the third quarter of 2019 was
unpredictable and volatile. Brexit continues to dominate the headlines in both
the UK and in Europe, and the election of a new prime minister appears to have
increased the chances of a disorderly exit from the European Union.

In your Q3 2019 market commentary, we review all the main
economic and political stories of the latest three months, and the latest
economic data.

UK

The third quarter of 2019 began as the previous quarter
had ended: with political upheaval. Boris Johnson won the Conservative
leadership contest and became the UK’s new prime minister in July, promising to
leave the EU on 31 October.

Indeed, he claimed he would rather ‘die in a ditch’ than
ask for another extension; something he may have to do if the courts uphold the
recently passed Benn Act.

Seven Commons defeats and a ruling from the Supreme Court
that his prorogation of parliament was unlawful means it has been an
inauspicious start for the new PM. And, a raft of economic data continues to
show that the UK may be heading towards a recession – even before we have
departed from the European Union.

The
UK economy contracted in the three months to July, marking the first quarterly
decline since 2012. Two consecutive quarters of falling output are the
technical definition of a recession, and analysts are holding their breath for
the next set of official growth figures.

Duncan
Brock, Group Director at the Chartered Institute of Procurement and Supply,
said: “Deferred client orders and reduced consumer spending as a result of
Brexit uncertainty and a slowing global economy meant hard-pressed businesses
started to lose their battle against the hardest conditions for about a
decade.”

In September, continuing uncertainty also saw the pound touch its lowest level against the dollar
since October 2016. Excluding October 2016’s ‘flash crash’ (when the
pound briefly fell sharply to $1.15 against the dollar before rapidly
rebounding) sterling has not traded regularly below $1.20 since 1985. This is
compared to the rate of around $1.50 before the EU referendum in June 2016.

During August the pound also dropped to
a decade-low against the euro of €1.07.

There was also a negative sentiment among many UK businesses:

RBS warned that its profits would be hit by
deteriorating economic conditions
HSBC announced 5,000 jobs would be lost as
part of its restructuring efforts
Belfast shipbuilder Harland and Wolff entered
administration

The problems on Britain’s high streets also continued
this summer. Tesco announced that it was cutting 4,500 jobs from its Tesco
Metro stores while Argos owner Sainsbury’s said that it was also planning to
close 50 stores.

The most famous name to collapse this summer was package
holiday firm, Thomas Cook. The travel agent failed to secure capital to see it
through the winter, resulting in the loss of 9,000 jobs and the biggest
peacetime repatriation in British history.

In more positive news, UK inflation fell to its lowest level since late 2016 as the end of
summer sales kept clothing prices down, while economists suggested that some
companies were waiting for the outcome of Brexit before putting prices up.

The consumer price index (CPI) fell to
1.7% in August from 2.1% in July, easing some of the pressure on consumers.
However, economists warned that weakness in the pound since Boris Johnson
became prime minister combined with a no-deal Brexit could push up inflation
again in future.

Europe

Eurozone economic growth is forecast
to slow to 1.1% this year from 1.9% in 2018, which would be its worst
performance in six years.

“German industry is in recession, and this is now also
impacting the service providers catering to those companies,” said Claus
Michelsen, head of forecasting and economic policy at the German Institute for
Economic Research (DIW Berlin).

Italy also saw a flatline in growth, partly due to
continued political uncertainty. Prime minister Giuseppe Conte resigned in
August following Matteo Salvini’s decision to
withdraw from the country’s ruling ‘yellow-green’ coalition, although,
in an unprecedented move, subsequently returned to power at the head of a new
coalition.

With growth slowing in the Eurozone, ECB president
Mario Draghi unveiled a package of measures to ease monetary policy in the
euro area. These included:

A cut in bank deposit interest rates to -0.5% to encourage lending
A restart of the ECB’s quantitative easing programme in November, with €20bn of bond purchases each month.

The move met with an immediate response from US President Donald Trump, who controversially claimed the ECB was deliberately weakening the euro to help companies sell goods overseas:

This
prompted a swift rebuttal from Draghi, who insisted that he was simply
following his mandate. He said: “We have a mandate. We pursue price stability
and we don’t target exchange rates. Period.”

US

The economic expansion in the US entered its 11^th
year in July, making it the longest expansion
since 1900.

However, as the effects of fiscal
stimulus from the 2018 tax cuts begins to fade, growth has slowed. The
manufacturing sector slipped into a recession during the first half of the
year, and capital investment is also weakening. Recent data from the ADP
Research Institute also showed that hiring at US companies is cooling, with employers
adding just 135,000 jobs in September.

All this means that analysts expect
growth in GDP to slow to 1.7% next year.

July saw the central bank announce its
first cut to its benchmark overnight lending rate in two years – and then
followed this up with another cut two months later. The rate now stands at a target range of 1.75% to 2%,
with the committee citing ‘the implications of global developments for the
economic outlook as well as muted inflation pressures’ as the primary rationale
for the cuts.

Stock markets rewarded the Federal
Reserve with a rally that took the Dow Jones Industrial Average from a
two-month low of 25,479 on 14 August back up to a near-record 27,219 on 13
September.

Rest of the World

In a new report, the United Nations has warned that weaker growth
in both advanced and developing countries means the possibility of a global
recession in 2020 is a ‘clear and present danger’.

The
UN’s trade and development body, UNCTAD, said 2019 will endure the weakest
expansion in a decade and there was a risk of the slowdown turning into
outright contraction next year.

China’s economy continued to falter in the
third quarter after GDP growth slowed to a near three-decade low in Q2
2019.

The ongoing trade war between China and the
US once again escalated again in late August following the US decision to
increase tariffs by 5% on all Chinese goods from 1 October. Although the two
countries agreed to resume trade talks in early October, the likelihood of a
truce anytime soon appears low.

Around the world, low inflation is allowing
central banks to ease their monetary policies to tackle faltering economic
growth. The Fed and ECB both loosened the reins in recent weeks, while Japan
could follow suit before year-end. Among developing economies, China cut the
reserve requirement ratio in August, while Brazil, India and Russia all cut
their interest rates.