Another Brexit talks deadline came and went last week as Boris Johnson and Ursula von der Leyen gave negotiators more time to make a deal on Sunday 13th December. After a gloomy week of headlines, both leaders agreed in a telephone conversation to go the ‘extra mile’.
With the UK’s transition period running out on 31st December with or without an agreement, both sides will need some time to ratify an agreement prior to that date.
The imposition of tariffs and customs checks at the borders will cause some disruption regardless of the outcome, and while a fall in the Pound as a result of ‘no deal’ would have a potential impact on inflation, the Bank of England and the Treasury would respond with looser monetary and fiscal policy respectively to cushion any blow. We still of course hope for a deal, but if one is not forthcoming, assuming sensible cooperation between the two sides, the economic hit should not be too large.
Globally, Japan’s Prime Minister Yoshihide Suga announced a fresh round of stimulus for the Japanese economy worth £530bn. Japan’s GDP fell by 8.2% in Q2 2020 before rebounding by 5.3% in Q3 – this compares to the UK’s 19.8% Q2 drop and 15.5% recovery.
In Europe, the EU’s landmark €1.8tn budget and stimulus package was finally passed after compromises were reached with Hungary and Poland. Conceived months ago, the funds will help Europe’s economic recovery, but more importantly potentially signal the start of much deeper fiscal integration within the bloc – something that is seen as crucial for its ongoing development.
In financial markets, we saw the UK equity market underperform all others due to deteriorating sentiment around Brexit. Much of the relative differential was driven by movements in the Pound, which fell markedly against all major currencies, including drops of 1.6%, 1.9% and 2.1% against the Euro, Dollar and Yen, boosting overseas holdings’ returns. The FTSE 100 fell by 0.03% and the FTSE 250 by 2.8%, with its smaller, more domestically focused constituents suffering more due to the weaker Pound.
European equities rose by 0.9% in Pound terms to be the next-worst performing region, with Emerging Market and Japanese equity markets each gaining 2.5% to finish the week strongest amongst the regions. Far East equity regions in particular have outperformed Western counterparts when Covid news has worsened due to their generally better handling of the virus; something that was again a factor this week as case numbers increased in the US and parts of Europe.
Government bonds rose sharply, particularly in the UK, in a reversal of recent weeks’ price movements. Gilts gained 2.8% and inflation-linked Gilts 3.6% as investors sought safer havens. In this vein, precious metal performed well in Pound terms, with silver rising by 1.3% and gold by 2.2%, providing protection against negative UK equity market returns.
We are faced with another week in which headlines will cause volatility amongst asset prices, even if they do not contain much substance. It is through such periods that a focus on the longer-term is vitally important to avoid knee-jerk reactions to shorter-term events; something that is essential to generating consistent, positive returns over time.
Market views by Ollie Stone – Head of Portfolio Management and Fairstone Private Wealth Ltd (14th December 2020)