Market Commentaries 2019
Jerome Powell, Chairman of the US Federal Reserve bank cast a surprisingly dovish tone at yesterdays meeting which has, in the minds of investors, nailed on a rate cut later on this month. Currently the market is expecting at least a quarter percentage point cut to the US base rate with speculation that any weakness in Q2 US earnings announcements next week could prompt a half a percentage cut to US rates in an attempt to stave off any further economic weakness from the worlds largest economy.
The US economy in the month of June put on a total of 224,000 jobs which was a big beat against the forecast 160,000 and up from May’s number of 75,000. Despite the slowdown in wage inflation, the result will reassure investors that the US continues to be in good health against the backdrop of slowing global growth. Conversely it will cause some volatility in the short term for markets as investors revise their expectations for the US cutting rates three times this year to potentially just two or one.
IMF boss Christine Lagarde will, in October, succeed Mario Draghi to become Europe’s first female European Central Bank president. The main question from markets is what will Mrs Lagarde bring to the ECB. Christine Lagarde has always supported fiscal loosening policies and dovish language on monetary policy. During her tenure within the IMF she stood the fund fully behind the ECB when it began its QE programme. Given this we believe the new head of the ECB will firstly support and then implement in October further interest rate cuts into negative territory and maintain another round of QE funding.
Equity markets are on the rise again this morning as investors reacted positively to the news of a truce in the US China trade spat. Donald Trump and Xi emerged from their meeting hailing it as a success but warning that more needed to be done to get the deal right. With Trump announcing a suspension on the next round of US tariffs on goods markets are hoping the two economies will manage to forge an agreement which will see all tariffs on Chinese goods removed.
Global markets reacted positively as Federal Reserve Chairman Jay Powell spoke about the need to once again become data dependant when it comes to the prospect of lowering US interest rates in the face of a slowing economy. Jay Powell’s speech came off the back of a speech from the European central bank outlining the same dovish message to global markets. Investors have, over the last few weeks, begun to aggressively price in one to two interest rate cuts from the US central bank and more monetary easing from the European equivalent which has seen both equity and fixed income markets move higher.
Last night the UK’s Conservative party took its first vote on who it wanted to be its next leader. Overwhelmingly the numbers came out in favour of front runner Boris Johnson who secured 114 votes out 313. A Boris majority was no big surprise but the extent of this lead did come as a shock as the margin was double the size of the second place candidate, foreign secretary Jeremy Hunt. The first vote was so in favour of Boris that some candidates in the race have considered joining forces just to compete. Historically the front runner in Conservative party elections has almost always fallen foul to a less well-known contender so watch this space !
June’s non-farm payrolls came in significantly below analysts’ expectations, showing only 75,000 jobs being created in the month of May versus the forecast of 185,000. On top of this, the year-on-year rise in average earnings for the month was also lower than expected, at 3.1 per cent rather than 3.2 per cent, highlighting that the labour market continues to show signs of weakening. This data added to speculation that the Federal Reserve will cut rates this year and led investors to seek the safety of debt, sending yields on US Treasuries and UK government debt lower, representing a rise in bond prices due to the higher demand. The dollar also weakened against all major currencies following the release.
TAM clients need not be concerned regarding the prominent position in the press this week of Neil Woodford's LF Woodford Equity Income Fund being suspended. TAM's portfolios hold no positions, nor have ever held any positions in the Fund. Woodford's fund was suspended this week as sustained and growing investor redemptions from the Fund risked not only the strategy's investment parameters being breached, but also the ability to obtain suitable outcomes for investors. Whilst TAM does not invest in the Fund, we remain aware of the risks posed by funds with poor liquidity and as such have released an investment note on the subject which can be accessed via the Research and Insights section at www.tamassetmanagement.com
President of the European Central Bank (ECB), Mario Draghi, has confirmed in a press conference today that the decision has been made to keep interest rates on hold at their record low levels until at least mid-2020. While the ECB raised its forecast for growth this year from the previous forecast in March, it lowered the forecast for growth in 2020. Similarly, they raised their inflation expectations for this year, but lowered them for next year. These were only minor tweaks, based on the ECB’s view that global headwinds continue to weigh on the outlook for the euro area. Mr Draghi cited key risks as being geopolitical uncertainties, rising protectionism and vulnerabilities in emerging markets. Despite the news, the euro rose by 0.5 per cent against the dollar following the announcement, indicating that the market wanted more drastic action, such as restarting quantitative easing, to support the eurozone and decrease the likelihood of entering into a recession.
Nigel Farage’s newly formed Brexit party were triumphant in the European elections, taking 31 per cent of the votes, comfortably ahead of the pro-Remain Liberal Democrats who came second place with 20 per cent of the votes. The Brexit party had one single pledge to the electorate which was to deliver Brexit, and this clear strategy was evidently preferred by voters who appeared to have lost faith in the Conservative and Labour parties which have been divided in their views on Brexit. Mr Farage’s next challenge is the by-election in Peterborough on June 6 and a potential general election later in the year. If the party wins the by-election, they will secure a place in the House of Commons, giving them a fighting chance in the general election.
In an emotional speech to the nation Theresa May announced she will resign as the Prime Minister of the UK. Whilst this announcement has been expected for some time her departure of the 7th of June is sooner than many had anticipated. The pound has managed to remain stable through the news which is testament to how expected the announcement was in the markets. The level of Speculation as to her successor continues to remain high with Boris Johnson remaining the bookies favourite to succeed her but that remains far from certain.
US Gross Domestic Product (GDP) numbers released today show a 3.2% annualised pace of growth for Q1 this year, surpassing analyst estimates of 2.3% growth. This was despite a number of issues overshadowing markets in the first quarter including trade tensions, a government shutdown and fears of a global economic growth slowdown. Several factors contributed to this growth figure, including higher defence spending and companies building up their inventory bases and net exports, while consumer spending and business spending actually slowed. Growth was also heavily concentrated in the Technology and Industrial sectors. US equity futures markets were relatively unchanged, edging slightly higher on the news. They are also being influenced by the ongoing earnings announcements, which continue to present a mixed set of results, with some big beats but also some big misses.
US job creation got back on track in March creating a total of 192,000 jobs up from a consensus figure of 177,000. This beat also confirmed February’s number of just 20,000 was more likely an anomaly but more importantly, it sent a reassuring message to global markets that the US economy is perhaps not as close to an economic slowdown as markets had predicted. Markets reacted accordingly with US equity markets rallying along with UK and Europe. Dollar also saw a bid on the news which was predicted.
MPs backed Theresa May’s plan to delay Britain’s scheduled exit date of March 29th by 412 votes to 202. The aim is to extend the deadline to at least June 30th, however if the deal already proposed by May is once again rejected by MPs next week, there could be longer extension to the deadline, possibly into 2020 or beyond, if May fails to convince the remaining 27 EU leaders that a longer extension is not a desired outcome. A longer extension to the deadline would mean prolonged uncertainty for the UK and is an outcome many are keen to avoid. Sterling remained stable after a volatile session, while UK equities continued to rise on the news.
In the second vote of three, the UK parliament last night voted by a majority of 49 against the prospect of the UK leaving the EU without a deal. Of the three motions being put to parliament vote this week, last night’s decision against leaving without a deal was the one that was expected to go through without a hitch. On the news, the pound predictably rallied in Asian trading as investors took reassurances that this was a step in the right direction to avoiding a disorderly exit. Despite the certainty of the vote against a hard Brexit the fact remains that there is still no agreement on an exit deal which, despite the desire to exit with a deal, leaves parliament stuck in the same quandary.
The UK government voted last night, once again, against Theresa May’s new Brexit deal by a margin of 149 votes. The vote represents yet another blow to the PM’s hopes of getting her deal passed. The next steps in the Brexit process are for a vote to be held in parliament tonight on the prospect of a no deal Brexit which is tipped to be voted down in favour of some sort of deal. Pending this there will be a final vote on Thursday to seek an extension from the 27 EU member states on the exit date still set for the 29th of March.
US employers added just 20,000 jobs in February, significantly lower than the market’s expectation of 180,000 and the fewest in over a year. This disappointing figure was offset by a fall in the unemployment rate from 4% to 3.8% and a rise in average hourly pay of 3.4% from a year earlier. This decline in jobs growth from January’s high was fuelled by the decline in construction jobs, while the fall in the unemployment rate was driven by many civil servants returning to work after the US government shutdown. Although there were several conflicting signals from this month’s jobs numbers, the immediate market reaction was generally negative and included a fall in US stocks and the US dollar, while safe haven assets such as US government debt, gold and the yen rallied.
Markets look set to open positively this morning as investors were buoyed by the tentative deal struck in the US overnight which looks set to avoid another US government shutdown. Naturally, the core of the issue was funding for the border wall with Mexico which Democrats have, all be it reluctantly, agreed to earmark $1.4 Billion to build an enhanced fence with Mexico. Despite funding being well off the $5.7 Billion Trump was demanding and only enough to fund fencing for just one quarter of the length demanded by the President. The compromise was exactly the climb down the President needed to avoid shutting the government down again. Whilst political commentators remain speculative about the deal it has pushed global equity markets higher at the open today.
The UK economy posted lacklustre growth numbers of just 0.2% in the last three months of 2018. This figure for the year was at 1.2% which is the slowest rate of expansion since 2012. Headline contributors to the slowdown were seen in UK manufacturing and UK consumer spending which appeared to show signs of being susceptible to concerns over Brexit uncertainty. These growth figures have prompted the UK central bank to put the likelihood of a UK recession this summer at 25%. Whilst this news is negative on a headline level, there remains positivity for UK growth should Parliament be able to secure itself a Brexit deal enabling UK businesses to once again begin to spend capital on expansion plans.
The US jobs market, true to recent form, has once again smashed expectations for jobs created in January with a figure of 304,000 jobs created, up from the anticipated 165,000. US markets opened higher as investors took the bumper number as further evidence the US economy continues to be in the middle of a sustained growth phase which flies in the face of ongoing concerns around a global economic slowdown. US government debt began to weaken on the news as investors saw the prospects of FED rate hikes in 2019 increasing in probability.
Stock markets across the globe rallied strongly on Wednesday following a dovish news conference by the Federal Reserve which eased fears that policy would be tightened too quickly. Fed chairman, Jay Powell, signalled they would be patient with raising interest rates, at least in the near term, and flexible with plans to scale back the bond-buying stimulus programme. Although there has not been a major shift in the economic backdrop, there has been some weakness in domestic demand as the positive impacts of tax cuts have begun to fade and the oil price has continued its decline, impacting global growth in major markets. These factors, along with heightened geopolitical uncertainty, led the Fed to take a pause on the unwind of stimulus into the US economy. The Federal Reserve’s dovish outlook boosted appetite for risk, sending US, European and Asian stocks higher, whilst the US dollar weakened on the news.
Theresa May has secured the backing of the House of Commons as MPs voted 317 to 301 in favour of her amended Brexit plan, proposed by Tory backbencher Graham Brady, which seeks for “alternative arrangements” to be made, including replacing the Irish backstop. Although a plan has been put in place, it is inevitable that there will be a clash with the EU, as even May admitted that the negotiations with Brussels will be difficult. For this reason, markets initially remained cautious, with the pound weakening on the news that the amendment put forward by Labour’s Yvette Cooper that sought to delay the date of Brexit was rejected. Sterling opened firmly on Wednesday however, as markets digested the news that May will be heading to Brussels with a Plan B for Brexit. The focus will now be on what the EU can offer in the renewed discussions.
Prime minister May continued through what has been a tumultuous week for the UK premier as she, last night, survived a no confidence vote from Labour party leader Jeremy Corbyn by just 19 votes. It was the Irish DUP party voting in favour of keeping May in power that managed to secure her the additional 19 votes she needed. May will now hold talks with opposition leaders to try and clear the impasse of the current Brexit stalemate and present a new solution to parliament on Monday.
At 8pm yesterday evening, Prime Minister May suffered the most crushing parliamentary defeat in British history as MP’s from all parties voted against her proposed Brexit deal by 432 votes against to 202 votes in favour. The result immediately sparked a vote of no confidence by Labour leader Jeremy Corbyn, but this is expected to fail as Labour lack the backing to secure a majority. What is clear is May’s proposed deal is now dead which throws up both the prospect of a delay to Article 50 and a softer Brexit deal. With Asia markets closing higher overnight and European futures pointing higher at the open, it is clear global markets see Brexit as a British issue.
The US economy has, for the month of December, created nearly double the level of jobs the market was predicting at 312,000 up from the 177,000 which was predicted. To accompany this, wage inflation accelerated at its quickest pace since 2009. These figures caused investors a conundrum in that the markets want the FED to slow the expected rate of interest rate hike’s, the FED, who maintain they are data dependent, have to take this latest job’s data as evidence that the US is still growing very strongly. Markets today are taking the news well with US and European indexes trading above the two percent level in intra day trading.