Weekly Market Update

04/02/2019

Optimism over trade talks between the US and China set a positive tone in global stock markets, as did a dovish stance from the US Federal Reserve. The fourth-quarter reporting season was also in full swing, and the early results were encouraging, with 66 per cent of companies reported beating earning expectations.

The Federal Reserve tone became further dovish last week, as it kept US interest rates on hold and dialled down its language. Less than a month ago investors had been expecting up to four hikes this year. This appears to be no longer the case. Powell also stated the Fed would be more flexible in reducing its balance sheet, attributing this to slowing global growth, and trade tensions.

Wednesday’s meeting was hardly the first time that jittery markets have convinced the US central bank to adjust its policy plans. In early 2016, an outbreak of market volatility prompted the Fed, then led by Janet Yellen, to sharply trim back the number of interest rate increases it was considering. However, it does raise the concern that the Fed could be overly influenced by short-term fluctuations in economic numbers.

In terms of trade wars, US and Chinese negotiators will meet again in February in an attempt to reach a deal before the end of a 90-day truce. In December, the two countries agreed to the truce to try and defuse their escalating trade war, which had led to new tariffs on billions of dollars of goods. The announcement came at the end of a two-day meeting in Washington, where China pledged to purchase an additional 5 million tonnes of US soy beans.

Italy’s economy contracted for the second consecutive quarter at the end of last year, throwing the country into a technical recession, seen as a setback for the new populist government. GDP fell 0.2 per cent quarter-on-quarter between October and December, following a 0.1 per cent decline in the third quarter. GDP in the 19 countries sharing the single currency rose by 0.2 per cent in the fourth quarter.

Once again Theresa May is heading for Brussels to negotiate a Brexit deal that the EU has already rejected. The Conservative Party did however, put on a rare show of public unity last week, after votes last Tuesday saw off attempts by parliament to take control of the Brexit process. The motion will allow her to return to Brussels to seek changes to the Brexit Withdrawal Agreement. This includes replacing the much-hated Irish backstop with alternative arrangements. Mrs May chances are slim. She will then return to the Commons to put whatever offer she has to a final vote in mid-February.

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