October presented several significant risk events which have passed without major incident, fostering some newfound optimism for global markets. The avoidance of a ‘no deal Brexit’ combined with a ’phase 1 Trade Deal’ moving towards signing have diminished some of the major chaotic risk outcomes, however further challenges remain. We await to see the result of the general elections in the UK for the next twists and turns in the 3+ year Brexit saga, and remain sceptical that material progress is being made around Trade. But alas, risk markets have moved higher, breaking out of well-defined ranges generating strong performance in a melt up rally.
Global data remains very weak, but some stabilisation noted
The macroeconomic data environment remains extremely weak on an outright basis, but some stabilisation of data has occurred. Current data is as weak as the environment prior to the GFC, and yet equity markets are breaking out to new record highs, showing little concern for possible capital damage. Central Banks continue to cut interest rates the world over, providing pre-accommodation to help economies cushion the blows of the previous rate hiking cycles combined with the confidence zapping U.S./China trade war.
More rate cuts delivered, hurting cash returns for savers, now pause and assess is likely into year-end for Central Bankers
Both here and abroad, 2019 has seen the delivery of interest rate cuts to spur weakening economies forward and extend the economic cycles since the GFC. Cash returns in the developed world are mainly below 1.00% except for the U.S. (although the U.S. is currently actively cutting interest rates). With the outlook brightening a little with regard to Brexit and the trade war, we believe that Central Bankers will move to a pause and assess period to see if market-based optimism translates into economic activity.
We believe that additional rates cuts will ultimately be delivered in 2020, but with only a few months now remaining, Central Bankers will wish to keep their small amount of stimulus powder dry.
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No deal Brexit was merely posturing by the UK Govt as a big, albeit a very termite ridden, stick threat. No deal was highly unlikely to eventuate due to the political self-destruction it would entail. The Govts own paper detailing the risks involved from a 'clean' break from the EU (Project Yellowhammer) highlighted dire consequences from shortages of food, petrol and vital medicines to major immediate manufacturing shutdowns due to JIT inventory deficiencies. Traders should have recognised no deal was never likely and the £ was oversold. The Brexit game is an open wound that will not be solved anytime soon. The ‘deal’ negotiated by the current PM is merely the end of the beginning. It is a withdrawal agreement – not close to an FTA. No party is likely to win a majority in the current election = another hung, paralysed parliament. Expect, against the Tories wishes, another referendum. What a wild, self-inflicted mess!
Happy to put a coffee on it Harry! I bet hung parliment vs your Johnson majority. The Torries don't have a majority now > they will lose seats in the south east (to the Lib Dems) and probably their Scotland MPs (to the SNP). Will they gain enough seats in the north from Labour to more than offset? I doubt it. But Farage will likely be the key to their northern success. Put a reminder in the phone for 13 Dec