WeeklyWatch – Stocks welcome boost thanks to bankers and trade hopes

Monday 24th June 2019

Stock Take

It seems that central banks are appearing to loosen the purse strings. On Thursday, the Federal Reserve left interest rates unchanged and opened the door to a rate cut in the near future – the yield on the 10-year US Treasury dipped down to almost 2% last week as investors continue to head for the safety of government bonds.

The European Central Bank held its annual forum in Portugal last week, and Mario Draghi said that cutting interest rates further was indeed an option; he even announced that there is “considerable headroom” for the ECB to buy new bonds. The euro dropped in response, boosting eurozone stocks and corporate bonds.

In addition, Mark Carney, Governor of the Bank of England, expressed the BoE’s willingness to cut rates to “a little above” 0% to help the economy in the event of a no-deal Brexit, precipitating a rally for gilts. But the greater surprise came in the announcement that the Bank will open its vaults to tech companies so as to better regulate digital currencies – Facebook last week announced the launch of its own cryptocurrency, Libra.

Who to believe?

Last week, Conservative MPs selected their final two leadership contenders: Boris Johnson and Jeremy Hunt. Both candidates argue they can negotiate a new and better Brexit deal. One of them claims he can agree it before the deadline of 31 October. The EU, meanwhile, says it will not negotiate a new deal. The other contender says he is willing to take the UK out of the EU without a deal on 31 October, despite the Speaker of the House of Commons saying parliament would block such an exit. Someone, it seems, is bluffing.

Perhaps the market’s response is the answer. Sterling has fallen to its lowest level in six months in response to growing expectation that the new Prime Minister will take a more hard-line approach to Brexit, increasing the likelihood of a no-deal exit. The pound has now lost almost 5% of its value against the dollar since the start of May. Naturally, the FTSE 100 had a strong week as a result.

Global markets key drivers revealed

Despite the UK’s internal turmoil, it is clear that global markets moved on from Brexit long ago. Last week, the results of a poll conducted by BlackRock showed that 45% of investors think geopolitics and trade will be the chief driver of market performance in 2019 (up from just 15% in 2018). On the other hand, fiscal and monetary policy was seen as the primary driver by more than 40% last year and is down this year to little more than 30%. Both factors held the headlines last week…

Stocks boosted by hopes of US-China trade deal

Last week Donald Trump hinted that a new US-China trade deal could yet be back on the table, duly delivering stocks a boost, with the S&P 500 striking a closing high midweek. The responsibility now falls on Japan, chair of the forthcoming G20 in Osaka, to encourage the two powers to shift from words to action.

Market participants were less encouraged by the direction of the US-Iran relationship. The US committed 1,000 more troops to the Middle East, and meanwhile, Iran shot down a US drone over the Strait of Hormuz. Trump warned that Tehran had made a “very bad mistake”, ordered a strike, and then cancelled the order.

Judges rock the geopolitical boat

Last week, a Dutch court ended four years of deliberations when it delivered a guilty verdict for four Russian-based separatists (three of them Russian, one Ukrainian) accused of shooting down commercial passenger plane MH17 in Ukraine in 2014. However, the Kremlin immediately disavowed the ruling.

Elsewhere, the Court of Appeal in London ruled that the government needed to assess whether Saudi Arabia had violated human rights in its military campaign in Yemen – the site of what the UN calls the world’s worst humanitarian crisis – before further arms sales are approved. The UK, 40% of whose arms exports go to Riyadh, will offer no new Saudi export licences for the moment.

But the London ruling might be the least of Saudi Arabia’s concerns. Last week, the UN released “credible evidence” that the Saudi crown prince was behind the killing of the journalist Jamal Khashoggi last year in the Saudi embassy in Turkey. It is also preparing its state oil giant, Saudi Aramco, for a delayed listing, and has now begun to crack down on the ministerial gravy train, as it tries to persuade potential investors that Aramco, which would be the world’s largest listed company, can develop good corporate governance practices.

Wealth Check

UK nationals are undoubtedly worried about how the economy will look after Brexit – a sentiment further confirmed by recent Bank of England (BoE) data, that shows that the public’s expectations for inflation in five years’ time have jumped to their highest level in a decade.

The public’s long-run inflation forecast rose to 3.8% in May from 3.4% in February. Estimates for the next 12 months dropped slightly to 3.1%, but are still well above the BoE’s 2% target. The Bank has also warned of higher inflation risks over the medium term, due to damage to supply chains and a shortage of foreign workers.

BoE Governor Mark Carney has said the Bank will need to raise interest rates gradually if Brexit goes smoothly, but financial markets are currently pricing in a rate cut in the next 12 months.

Clearly, sitting back and hoping for higher interest rates and lower inflation may not be the answer if you’re looking for a real return from cash savings. Over the long term, investing in a well-diversified portfolio can potentially provide better protection against inflation than cash deposits.

If you are in any doubt, make sure you seek financial advice to help you make the right decisions. In the midst of short-term uncertainty, an experienced adviser will provide the emotional discipline required to ensure plans are acted upon, by providing guidance, support and stability to help you stay on course to reach your financial goals.

In The Picture

The UK sits between continental Europe and the US in more ways than one…

The Last Word

I don’t think you learn much from success, but you learn a great deal from failure.

Adrian Furnham, Principal, Behavioural Psychology, Stamford, speaking in a panel debate that will be published on Insights later this week.

 

The information contained is correct as at the date of the article.

The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

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