Are we moving from winter to spring in the equity markets?

There is increasing evidence that the global industrial production cycle is turning more positive. It feels like China and the US are inching towards a trade deal, which would be good for global confidence, as well as risk-assets, because it could signal that peak tariffs has been reached.

Importantly, Germany avoided a recession in the third quarter, recording economic growth of 0.1%.

In Europe, the uncertainty created by Brexit might be resolved positively in the coming weeks if the Conservatives manage to hold on to their current 8-10 percentage points lead in the polls as the 12th December election approaches. As has been widely reported, the withdrawal of Brexit Party candidates in constituencies held by Conservative MPs should provide a boost for Boris Johnson’s hope of a majority.

Finally, the Fed appears to be indicating it will hold interest rates at the upper bound of 1.75% as the Fed Chairman, Jerome Powell, appeared to lean in a dovish direction during his comments this week. The comments suggested he is very biased against hiking interest rates until clear evidence emerges that worrisome inflationary pressures are real.

This portrays a benign environment for risk-assets but there are three reasons to temper an overly bullish outlook and remain market weighting in equities.

Firstly, the Sino-US trade deal is not done yet and reports suggest the two sides are still trying to settle on Chinese purchases of US agricultural products and Intellectual Property protection. On top of this, China could take offence if the Hong Kong Human Rights and Democracy Act, which has been passed by the House of Representatives, is passed by the US Senate.

Secondly, if the Conservatives maintain their 10-point lead, it’s highly likely that they will get a majority big enough to allow Mr Johnson to get his Brexit deal ratified. However, given the Tories will lose a fair chunk of their 13 seats in Scotland and some others to the Lib Dems in England, Johnson cannot afford to lose more. This means the target lead for the Conservatives is probably around 6-7 percentage points; if the lead drops below that a hung parliament, with all the uncertainty which that entails, becomes a much more likely outcome.

Thirdly, the strong US Dollar and tight liquidity in the emerging world remain concerns for investors. A weaker US Dollar would help reflate the global economy and encourage investment flows into emerging markets. If the Dollar does not weaken, it would act as a headwind to growth.

What else of note has happened in the past seven days?

Well according to an FT story published late last night, Michael Bloomberg, the billionaire former mayor of New York City is laying the groundwork to enter the Democratic presidential nominee race. If the story is confirmed, this will be taken as market friendly since it may force Elizabeth Warren – who is currently viewed as the front-runner to win the Democratic Party nomination – to tack to the right on some of her more market unfriendly policy proposals. So, this should be beneficial for risk assets too. One negative piece of news this week was the unexpected fall in US nonfarm productivity during the third quarter, as the year on year rate declined to 1.4%.

Although the source is unknown, one quote that should give investors pause for thought is: “in the short-term productivity does not matter too much; in the long term it is all that matters.”

© 2019 GWM