Market Commentary January 2019
As we move into 2019, it seems the only thing we can be certain of is uncertainty.
In the UK, Brexit has dominated the start of 2019. While the British public looks for clarity and direction in the midst of incessant debate and an unending stream of possible outcomes, ultimately, we appear to have only one deal on the table. Despite UK Prime Minster Theresa May’s attempts to make various “tweaks around the edges”, Europe’s resounding response to any further negotiation is “non”. I suspect the founders of the Euro didn’t quite anticipate that we would find ourselves in this position on the currency’s 20-year anniversary. Meanwhile, the Prime Minister survived a vote of no confidence following her deal’s crushing defeat by 230 votes. She stated that “MP’s have made clear what they don’t want; we must work constructively to find what MP’s do want.” While Pound Sterling has been buoyant in the hope of a no-deal Brexit being avoided, the ongoing uncertainty is weighing on confidence in the UK. Resultantly, the economy stalled in the three months to the end of November as manufacturing output dropped to its lowest level in almost two years. GDP growth slowed to 0.3% – down from 0.4% in the three months to the end of October. UK Consumer Price Index (CPI) was 2.1% in December falling to a 22-month low driven by a fall in petrol prices.
The US has seen factory activity fall to a two-year low, and sales warnings from Apple have sent a ripple of nerves through markets as fears about another global recession mount. Current implied probabilities of US rate hikes this year have dropped to below 18% for the whole of 2019. The US Fed Chairman, Jerome Powell, commented at the beginning of the month that the threat of a slowdown in economic activity may cause the Fed to reassess its projected pace of tightening. The Federal Open Market Committee (FOMC) minutes had a dovish bias with several references to weakness reported by the private sector; such qualitative economic data was viewed as more significant in light of the government shutdown. Analysts now believe that the Fed will remain neutral this year and may even look to cut rates in 2020. President Donald Trump continues to attack Democrats for the record-length US government shutdown which has been caused by an argument over funding for the construction of a US-Mexico border wall. Polling suggests most Americans blame Trump for the impasse.
In Europe, inflation data released by EU statistics agency Eurostat showed that levels have fallen to 1.6% – the lowest level recorded since last April – due to a fall in oil prices. Business activity in the area has also fallen to a four-year low. The drop could well impact the European Central Bank’s (ECB) decision making process before raising interest rates given their target rate of 2%.
Fears that Germany has fallen into recession have been fuelled this month after Europe’s largest economy suffered a sharp decline in industrial production. Economic sentiment in the single currency bloc deteriorated markedly in December, dropping in all 12 months of 2018.
There seem to be political challenges across the area, with pressure mounting on President Marcon as unrest in France continues. Meanwhile, the Greek Prime Minister, Alexis Tsipras, survived a vote of confidence after his government coalition broke up, and Italy continues to tackle its budget overspends.
The Organization of the Petroleum Exporting Countries (OPEC) cut oil production in an attempt to push prices up from recent lows. However, data released from China – the world’s second largest economy – suggest a gloomy economic outlook following a slump in exports in December and slowing imports. This adds further uncertainty given the state of the global economy and growth potential over the coming year.
What’s more, the International Monetary Fund (IMF) and the United Nations (UN) issued gloomy forecasts to mark the start of the World Economic Forum in Davos, warning that a slowdown in global growth could become more severe amid escalating trade tensions and China’s weakening outlook
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