Christopher Peel’s Market Notes – May 2019

Christopher Peel gives his views on global financial markets:

Market Views

Global equity markets have performed well this year and further upside is likely, despite the recent downward revisions to growth by the OECD and IMF. Company earnings surprised many in Q1 and the next 2 quarters will be equally important. With the dovish FED on hold, strong jobs growth, low inflation and it being the 3rd year of Trump’s presidency, further upside in the US market is likely.

The pause in the tightening cycle is a potential headwind for the US dollar, which will benefit equity markets in Asia and Latin America such as India and Mexico, especially those with adaptable supply chains. Bond markets are finely priced and are vulnerable to any signs of inflation, higher inflation expectations or any re-pricing of the liquidity premium.

Monetary Policy

We expect that the FED, BOJ, ECB and BOE will leave short-term interest rates unchanged for all of 2019. A timely and successful conclusion to the US-China trade negotiations could alter FED policy but the base case is for rates to be on hold. The ECB is running out of cards to play and is increasingly at the mercy of the global economy to reach a sustained rate of growth. The PBOC will continue to be accommodating by injecting cheap money into their domestic economy as part of the wider Belt and Road initiative.

Risk Environment

The investment environment remains favourable for risk assets, especially in the emerging markets. Too much attention has been placed on the US-China trade negotiations and not enough on the other trade deals that have been reached such as the Trans-Pacific Partnership Agreement (TPP), the United-States-Mexico-Canada Agreement (USMCA) and the EU-Japan Trade Agreement. Global trade volumes have slowed over the last year, but these deals will lead to an increase in global trade in the future. Government debt will remain underpinned by the pause in quantitative tightening and low level of inflation, but the doubling in size of the corporate bond market over last decade presents a potential threat for large capital losses. The latter point was highlighted in Jerome Powell’s recent press conference.

Brexit

The chances of a hard Brexit have risen with the imminent resignation of Theresa May. Boris Johnson is the front runner to be her replacement and would bring a respected politician into Number 10 with a proven track record of leadership, stemming from his role as the Mayor of London. There will be other candidates, but the Conservative Party cannot afford another mistake and must reassert its authority in the democratic Brexit process. The odds of an early general election remain very low, given that the Tories and DUP would likely be voted out office due to voter apathy.

European Elections

The election results will not be known until Sunday evening, but the outcome will likely be a non-event. This is primarily because the rise of anti-EU parties is already widely anticipated and will not necessarily complicate EU policymaking. Most likely the long-established grand coalition of centre-right & centre-left groupings will concede ground to both Eurosceptic and alternative pro-European parties. The result will be a fragmented but still pro-European majority; a broader coalition that will increase the influence of MEPs that are among the strongest supporters of a closer union. The protest vote in the UK against the mainstream parties will work in favour of Nigel Farage’s Brexit Party. This is already widely discounted in the polls/press and will not come as a surprise to financial markets next week.

This investment Blog is published and provided for informational purposes only. The information in the Blog constitutes the author’s own opinions. None of the information contained in the Blog constitutes a recommendation that any particular investment strategy is suitable for any specific person. Source of data: Tavistock Wealth Limited. Date of data: 24th May 2019 unless otherwise stated.

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