January 2019 Markets in a Minute
Welcome to your first Markets in a Minute for 2019. Following the alarming stock market falls of ‘Shoctober’ and ‘Deathember’, global equities enjoyed a significant recovery in the first month of the year.
• UK and International shares have risen broadly 4-5% in January. Buyers will have been encouraged to return to the market by policy makers more explicitly communicating their willingness to support economic growth.
• It might seem counterintuitive to believe that policy makers would want to do anything other than support growth, however, central banks are mandated to cool an economy if signs of excess (imbalances) begin to form.
• Higher levels of inflation would be one such signal. An acceleration in price increases could encourage a frenzy of buying activity as consumers fret further price increases await. These advanced purchases will often be funded by debt rather than savings, placing an economy on a precarious footing. To ward off such threats central banks will discourage borrowing by increasing interest rates.
• Inflationary measures took a marked downturn during the final quarter of the year as oil prices fell dramatically. Oil ‘leaks’ everywhere into the inflation calculation; whether it is at the petrol pump, as an input to manufactured goods, or in utility bills.
• Falling levels of inflation reduce pressure on central banks to cool economic activity. Consequently, over the course of the past few months, central banks globally, particularly the US Federal Reserve, have guided to a slower pace of interest rate increases for the year ahead.
• This policy setting extends the prospective life of the current economic cycle and, in so doing, the window in which equities can outperform.
The US and China
• Markets have also been supported by further efforts from the Chinese leadership to ameliorate their slowing growth profile. Such measures include policies to promote bank lending, a reduction in income tax rates, and permissions for local authorities to initiate accelerated infrastructure spending.
• These adjustments operate with a lag, meaning an improvement in the economic data might take some months to materialise. Markets, however, will move in advance of such an outcome; just as they will typically move lower in advance of a deterioration in growth.
• There have also been more constructive tones emanating from the respective negotiating parties involved in the US-China trade talks. Of course, this is a hard one to predict but, for fear of further roiling markets, Trump is seemingly intent on securing a deal or, at the very least, an extension to the current ceasefire.
• The probability of a ‘No deal’ Brexit increased toward the end of the month as a slim Parliamentary majority encouraged the Prime Minister to renegotiate the Withdrawal Bill, with a primary aim of securing an alteration to the current ‘backstop’ proposal.
• Such an objective looks difficult to achieve and threatens to ‘run down the clock’ without any progress toward an agreement having been made.
• Yet, whilst a ‘No deal’ arrangement might be acceptable to many amongst the electorate, those views are not replicated in Parliament and avoiding their manoeuvrings to avoid such an outcome remains the view of many.
• Economic fundamentals do not paint a picture of imminent recessionary risks. Indeed, policy makers recent efforts to communicate their accommodative bias have only served to embolden this view.
• Investors should make every effort to avoid overstating the importance of politics in the evolution of the global economic cycle, despite its dominance in the headlines. Should that situation change, however, and the significance of any political issue becomes elevated, we will be ready to act.
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