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Weekly Market Review - 21 January 2019

The big news this week was that EU agreed to allow the UK to extend the Brexit deadline to the 31st…
Strong numbers coming out from manufacturing and service surveys in the US and China helped push…
Whilst global equity markets are flat on the week, they are up year-to-date 12-13%. However, the big…
Global equity markets are up roughly one per cent this week. Volatility is still low and ten year US…
It has been a tough week for equity markets, which were down some 2%. Bonds on the other hand helped…
Those who follow this commentary know the authors believe that the three main market driving topics…

Markets have continued to remain relatively calm this week with the volatility index hovering below 20 and global equity markets roughly flat. Government bonds yields in the US have been flat on the week whilst risky credit has rallied a little

However additional issues have cropped up over the holidays. Probably, the most worrying occurrance was the continued bullying by Trump of US Central Bank Chairman Jerome Powell. Reports that the President inquired about firing Powell is a disturbing sign for markets. This kind of behaviour is to be expected in some emerging markets but for this even to be discussed in the US is worrying.

It appears that the relative calm has been restored by policy makers hitting pause on interest-rate increases. Alongside this, US and Chinese officials have been conveying a message that the second pause button will be hit soon, stopping the mutually destructive approach to trade. A trade truce announced before the next set of tariffs is due to go into effect, on March 2nd, is not guaranteed but things are looking positive at this stage.

The US government shutdown continued this week. According to a Goldman Sachs research note, US GDP growth is
reduced by 0.07% for each week that the shutdown is in effect. However, should the shutdown end, the economy tends
to get this growth back in the following quarter.

This quantitative analysis explains why the shutdown has had such a small impact on markets to date. However, now that the shutdown has lasted for so long, investors should be monitoring the situation more closely for what it might tell markets regarding the state of affairs and the US political situation.

On the economic front, this week has been good. The two economies which matter the most for global markets are the US and China.

Chinese credit growth came in above expectations and the Chinese government announced some tax cuts. Data from China could bottom in the first quarter of this year, which would be a boost for risk-asset prices. In the US, the Philadelphia Fed manufacturing index rebounded strongly against expectations for a smaller increase, which was welcomed by markets.

The US earnings season has just begun and many investors are keeping a keen eye on banks as they are so important for the economy. Earnings dispatches from Goldman Sachs and Bank of America proved that investors had radically underestimated both the health of the real economy and the resilience of the banks. Over the week, Bank of America rallied 8%, Goldman Sachs rallied 10% and the US banking index rallied 4%.

Finally, this week there was movement on the Brexit debate but not a lot of reaction in the markets as both events were widely expected. After Mrs May’s deal went down to a record defeat in the UK parliament and her government survived a vote of no confidence the central view remains unchanged.

It looks likely that either there will be an exit deal or there will be another referendum, meaning a hard exit should be avoided. On the other hand, before the country arrives at this point cross-party talks may well stall and Mrs May will possibly tilt towards a no deal Brexit as part of her last-ditch effort to get some version of her deal passed. Should things play out as above, investors should watch for some short term pound weakness but for the pound to move higher over the long term. It is possible that the current two party system in the UK may not survive the events to come and there may well be some civil unrest along the way, so investors should remain flexible as key facts change.