In the political game there were two positive events last week that provided investors with some well-deserved relief to October’s market falls. Firstly, US Fed Chairman, Jay Powell acknowledged that interest rates were reaching a neutral position, and secondly, the US President, agreed to hold off on imposing higher tariffs on Chinese imports next year. Trade will likely continue to act as an anchor on markets in the year ahead, but in many ways the more trade and tariffs weigh on growth the looser the Fed will remain. In some ways we are back to the bad-news-is-good-news play for equities.
In the US, investors interpreted Jay Powell’s comments that it was an indication that the central bank was preparing to slow down its rate-rising programme. Mr Powell stated that the central bank would be paying very close attention to what incoming economic and financial data is telling them. The markets reacted sharply to Mr Powell’s comments, which contrasted with an assessment he gave last month. There was also a pronounced weakening of the US dollar after his speech, paving way for some positive momentum in emerging markets currencies.
In the UK, as the withdrawal deal vote marches closer, Mark Carney, the governor of the Bank of England, indicated that a disorderly Brexit would hit the UK economy extremely hard in the short term. On the surface, the BoE’s analysis offered some support for Theresa May’s argument that her proposed Brexit deal is the only viable option in the circumstances. The hope was that this would increase its chances of gaining parliamentary approval. But some MPs are likely to take the BoE’s pronouncements with a pinch of salt, given that the central bank predicted a much more negative economic outcome from the Leave vote than actually came to pass.
There was also some good news for UK banks as the Bank of England stress tests, revealed that they are strong enough to survive a disorderly Brexit. Stress tests showed that the UK’s seven largest banks and building societies would be able to continue lending in the event of a no-deal Brexit.
On the data front, US house price gains shrunk to their lowest levels since January 2017, while UK consumer confidence fell to its lowest level in a year. German business confidence also weakened for a third month in a row, while China’s manufacturing activity continued to slow in November, with the manufacturing purchasing managers’ index coming in at 50, its worst result in more than two years.
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