January 2019

We are pleased to now resume our market commentary after a short pause at the end of last year. 2018 proved to be a very difficult year in the markets with virtually all the major markets that we cover ending in negative territory over the calendar year:

Financial markets have recently given little clarity in the direction they will be heading in 2019. Major equity benchmarks and oil prices rose by the most in almost ten years on Wednesday 26th December, retracting some of the losses from a turbulent run up to Christmas. The Dow Jones gained five per cent in a single session, while the Nasdaq Composite jumped 5.9 per cent. It marked the best day for each index since March 2009.

Technical factors mainly explain this rise, as pension funds bought $100bn of stocks over the year-end period, as they rebalance their portfolios. Safe havens have quickly resumed their leadership in 2019 however, after finishing 2018 as the only assets in positive territory. Gold prices surged to a six-month high in response to political uncertainty and fear of recession. The flight to safety also coincided with a stronger Japanese yen against US Dollar. The Dollar was also hit by developments in Washington, as Congress and the White House enter another phase of negotiations to bring an end to the US government shutdown.

The markets have started the new year as they ended the old one, with some wild price swings. After a December that blew apart the Santa Rally story by posting the worst returns of the year for the first time, and in doing so ending a reliable ‘easy week before Christmas’ story topic for journalists (and analysts) everywhere.

2019 is starting off with some major challenges: the US government remains shut down; Brexit remains uncertain and trade wars are hurting global growth. While all these things have the potential to resolve themselves in the next few months, they equally have a chance to drag on for the whole year and do some serious damage. The potential for things settling down in the short term look limited. Many commentators have stated that these issues could be in the ‘rear view mirror’ by the middle of the year, however, politics seems to have entered a more turbulent period where the characters and reports lurch from one extreme to the other very quickly.

Earlier in the year, we saw that Kim Jong-un met with President Trump on the 12th June 2018 in Singapore after months of escalating tensions and twitter spats that had many reporting that a war on the Korean peninsula was becoming inevitable. Things change very quickly in the modern world of politics and are likely to take a few more twists and turns as we get into the year ahead.

In the US, the question everybody’s discussing is, is the Fed support back on? A few weeks ago, the Fed chairman Jerome Powell said we’re ‘a long way’ from neutral on interest rates, and therefore indicated that more hikes were coming, and the stock market didn’t like it at all. Then Trump said in an interview that he is “not even a little bit happy” with the Fed chief which he himself appointed. Powell then appeared to have changed his view, and potentially quite radically, and said the central bank’s policy rate is now “just below” estimates of a level that neither breaks nor boosts a healthy U.S economy. There is now a complete breakdown in consensus for the future US rate path. Has Trump got to him with all his comments and tweets, is just one option. It could of course be another central bank communication failure with which the UK is also familiar or just the Fed reacting to deteriorating data – let’s hope it’s the latter. There is one conclusion that we are sure about in the short term, the stock market loved it but an acknowledgement that data is weakening, especially in housing and autos, implies this may be another temporary sugar high.

The most recent data in December showed that the US economy added 312,000 jobs, far ahead of the predictions of 177,000. This immediately led to a further good day in the markets.

The breaking news over the first weekend of December came from the G20. The key takeaway (apart from assorted but rather disconcerting hugs and handshakes) seems to be a pause in the trade war between Trump and China. This was swiftly followed by the arrest of the Huawei finance chief Meng Wanzhou in Canada that led to another swift market sell off and heightened the tensions over the China / US relations.

Brexit’s Next Stop

Apparently, the term Brexit was first coined back in 2012 and it certainly feels like it has been going on for at least six years, if not longer. We are certainly reaching another watershed moment with Prime Minister May’s proposal drawing derision and scorn from such a broad church that it’s almost paradoxically unifying.

Theresa May has warned the UK faces “uncharted territory” if Parliament rejects her Brexit deal as she vowed to redouble her efforts to win MPs round. Next week’s vote would “definitely” go ahead, as she promised new safeguards for Northern Ireland and to look at giving MPs more say in shaping future EU negotiations.

The deal failed to get through Parliament and therefore the rounds of negotiations and brinksmanship will inevitably lead to a last minute solution in one of the three potential outcomes:

• DEAL – A revised deal that does get through Parliament
• DELAY – An extension of Article 50 with possible new referendum
• NO DEAL and revert to WTO rules

One really important point seems to us to get perpetually lost in much of the debate. The EU is neither stable in its construct (more countries to join/leave) nor the finished article (ever closer integration?). Its future as a single entity is further complicated by the single currency which is backed by an ECB, which itself has considerable hurdles to overcome, for example how to effectively exit QE, let alone ever raise interests again.

Member states such as Italy, which even by its own complicated political past have multifaceted issues to address on the budget, banks and debt, appear to be being played out via daily newspaper updates. Our fundamental point here is what we think we are leaving might not look like its current construct in a few years’ time but that’s about all we can assume. In the meantime, the Brexit headlines will no doubt continue to dominate the news here in the UK and we still can’t rule out another referendum, a snap general election,
a soft Brexit or a hard one.

If there is one saving grace in the current Brexit mess, it’s that we have our own currency and will inevitably find our way in the world where our spirit of endeavour and capacity for sheer hard work may be required more than ever to transition to the future.