A new topic for investors to follow

Those who follow this commentary know the authors believe that the three main market driving topics are trade, Chinese stimulus and Brexit. However, one additional topic is knocking on the door for inclusion: Will the Fed start to follow an inflation make up strategy? This is a somewhat ‘wonky’ topic but nevertheless investors should start to consider it in more detail.

In plain English this means that the US Fed could allow inflation to overshoot the 2% target in the future to “make up” for the periods when it has been below 2%.

This would result in a significant easing of monetary policy. It appears that markets have started to price this in and this could explain why gold has performed so well this year in spite of the fact that the dollar has not really moved. Broader markets, like equities and fixed income markets, would take such a move positively too. In any case the Fed does not appear to be waiting around: it has heard the recession call from the markets and is working overtime to make sure that market participants are on the wrong side of that bet. This is one of the reasons why being market weight in equities, despite the fact that developed economies are late cycle, makes sense to some investors.

Progress on trade

On Monday Trump announced that the 1stMarch deadline for increasing tariffs on $250 billion of Chinese goods would be extended; this is very good news. No new deadline was proposed but Trump has said that a summit between Xi and himself was planned to conclude an agreement. This summit is likely to be held in late March. A successful agreement could provide a pathway for tariffs to decline gradually in the future so everything markets have heard this week on trade has been positive. Chinese equities have responded in kind and are up 4-5% since Monday.

Progress on Chinese data

Turning to Chinese data, overnight one of the widely followed indicators of future economic activity turned up in February, so there is more evidence that economic activity is bottoming in China. Also noteworthy is that on Monday the China Banking and Insurance Regulatory Commission issued a strongly worded notice to banks exhorting them to support private sector and micro and small enterprises. It appears likely that investors will see a positive turn in the Chinese hard data in the second half of this year.

Progress on Brexit

On the Brexit front, this week has been quite dramatic. Rather than going through the situation blow-by-blow, investors should note that the likelihood of a No-Deal Brexit has been reduced and sterling has rallied hard. On a relative basis this is good for those UK investors who have smaller non-GBP exposure.

Equity markets were down just a fraction on the week and volatility continued to
remain pretty low, although equities rallied on Friday.

© 2019 GWM