The weakness seen in equity markets during the third quarter persisted into the first three weeks of the fourth quarter with markets generally down more than 3%, (U.K. and U.S. down 4%) before picking up. Improvement in the U.S./China trade negotiations and the U.K. general election result were the main catalysts for the rally which saw all equity regions higher to year-end with Asia and Emerging Markets performing particularly well. In the U.K., small-cap stocks out-performed large caps.
A year and a half after the U.S./China trade war began, the two sides agreed to a phase-one trade deal (now signed) which brought relief to the markets. U.S. tariffs on China were due to increase in December but the announcement avoided that outcome. The U.S. has agreed to halve some of the new tariffs it has previously imposed on Chinese products in exchange for China purchasing an additional $200 billion in U.S. goods over the next two years and strengthening intellectual property rules.
In the UK, stocks rallied following the general election result. The Conservative Party gained its largest parliamentary majority since 1987 and won the largest share of the vote by any party since 1979. Although the consequences of Brexit remain unclear, markets are optimistic that the UK will enter a more stable period of economic improvement although current data releases continue to be disappointing e.g. December’s PMI (Purchasing Managers Index) fell to 47.5 (note that a contraction in economic activity is indicated below 50). Almost immediately after the election the FTSE 100 broke above 7418, a key technical level, at its fourth attempt since August, and we would want to see that support hold.
The Pound rallied over the quarter and spiked higher in the days following the general election although those post-election gains have since been given back. The market sees a risk that the size of the Conservative majority will raise the chances of a no-deal Brexit once again if trade talks with the EU, which are due to conclude by the end of this year, do not go well. The Pound is likely to remain volatile over the next year until the talks are concluded.
After a strong period through to the end of September, government bonds generally declined in the last quarter.as Bond yields have started to rise again after a long period of falling. Other Bond sectors though, such as UK High Yield, continued to perform well through year end. Central banks remain supportive and there is an expectation that low, or negative, interest rates will persist.
Leading economic indicators, which were under pressure for much of 2019, seem to be stabilising and although manufacturing business surveys in the U.S. and Eurozone remain weak, an improvement in the services sector and robust employment numbers mean most analysts believe a recession is not imminent. Markets could maintain recent momentum in 2020 if the expectation of a strong increase in growth is met and if a positive outcome in the next round of the U.S./China trade negotiations is delivered. Consumer confidence has stayed strong and the U.S. economy remains resilient but global growth is weak, and the markets will look for further stimulus from central banks if needed.
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