Weekly Market Update

10/12/2018

The only way is down, well that’s what markets currently believe, driven by negative news flow. The gains made at the end of November were swiftly erased as global equity indices resumed their downward trend with a vengeance. Most of the themes that drove the downturn were all too familiar. In the UK, the government’s Brexit plans were plunged into further disarray, while the hopes of a resolution to the US-China trade war, which rose following the G20 summit, were short lived.

With markets volatile, and ultimately making little progress this year, there would seem to be scope for some seasonal good cheer this December. However, it would be unwise to base any investment strategy on this or any other stock market adage. Trying to time the market to play short-term trends can have expensive consequences if you get it wrong. In 2002, for instance, the stock market fell heavily over the course of December.

Oil ended the week below the $66 at which it entered 2018, although that all changed as OPEC agreed to cut production by 1.2m barrels a day, defying opposition from US President Donald Trump, who wants to keep supply high and maintain low prices to act as a tax cut.

Relations between China and the US took a negative tone when Meng Wanzhou, the chief financial officer of Chinese telecoms giant Huawei, was arrested in Canada, in connection with the alleged violation of American sanctions against Iran. Meng, who is the daughter of Huawei’s founder, is now facing extradition to the US. The fear is that China will likely become more negative in respect to the trade war, and potentially against US companies.

In the UK, the FTSE 100 fell to its lowest level in two years. This sell-off came as Theresa May’s Brexit plans were faced with further disruption. The government was forced to publish the legal advice it had received on its proposed Brexit deal. It was also held to be in contempt of parliament for not having done so earlier. Although the prime minister was determined to press ahead with a vote on her deal, it appears that this has now been delayed. A further curve ball was that the European Court of Justice confirmed that Article 50 exit clause can be unilaterally revoked, allowing a country to reverse its decision to leave the EU during the two-year period.

The markets have got themselves into a funk over lower oil prices and US and Chinese business cycle risks. At the time of writing, the market is not expecting much more from the Fed, even though the Fed itself thinks it is not quite at neutral yet. This bearish ending to the year might be short-lived. The US data doesn’t point to imminent recession risks and, business cycles don’t die of old age (or indeed from stock market volatility). Unless we are totally misjudging the impact of the current level of real interest rates, it seems to be the case that if the Fed pauses after a hike in December, optimism on the growth outlook and markets could come back very quickly.

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