Focus shifts from politics to economics as trade damage becomes visible
Stock markets had reversed most of August's losses until poor data in the first week of October sent markets back to their summer lows. Fixed interest bonds, which had fallen sharply on a change in central bank policy, returned to near their record highs. There has been a subtle change in what is driving markets: attention has shifted from politics to economics and signs of the damage caused by the reversal of global trade co-operation and Brexit uncertainty.
Purchasing Managers Surveys signal contraction across the globe
Forward-looking Purchasing Managers Surveys around the world pointed to contracting growth and the prospect of imminent recession in several countries, including Germany and the UK. The US remained in expansion mode, but the sharp deterioration in manufacturing and services indicators provoked real fears that recession was on its way. By contrast, American unemployment was the lowest in 50 years.
Meanwhile, US-China trade talks and Brexit acrimony continued with little tangible progress on either front. In the case of the former, the US offered to postpone some tariffs as a sign of goodwill. As is so often the case, a new dispute threatened when the World Trade Organisation gave its blessing for the imposition of tariffs on European exports to America in retaliation for subsidies on Airbus.
The ECB restarts quantitative easing as the Fed cuts again
The European Central Bank announced a further cut in interest rates, to minus 0.50%, and the reintroduction of quantitative easing to boost the slowing economy. This was in line with expectations, but the announcement of a unanimous verdict in favour of fiscal policy becoming the main instrument going forward surprised investors and triggered a sell-off in the bond market.
The US Federal Reserve cut interest rates by a further 0.25%. The decision was not unanimous, however, and the accompanying statement signalled that, despite uncertainty over the effects of the trade dispute on future growth, there could be a pause before further cuts. This predictably provoked the ire of President Trump, who fired off a series of disparaging tweets referring to members of the central bank as "Boneheads" and "Pathetic".
A note from the desk
I am pleased to share our monthly update on market events. The overview seeks to summarise market movements together with our views and the rationale for the positioning of investments going forward. As always, should any aspect of this commentary prompt a question, we would welcome the conversation.
Martyn Charlwood · Managing Director
The real economy needs a boost, and it should come from government spending
Tariffs, whether real or threatened, have led to strikingly large falls in export markets, notably Germany, Singapore and South Korea, and a global contraction in manufacturing. Further, the effects of existing trade taxes are seen in the fall-off in investment spending: companies are less likely to commit to new projects when the supply chains that have been built up over many years are being threatened. We have mentioned before the Brexit paralysis suffered by many UK firms, with investments and new orders being deferred and overseas companies seeking new suppliers from outside the UK. Recent data suggests that this is now having a negative impact on employment, though so far this has been more through not replacing leavers rather than issuing redundancy notices.
Despite the gloomy outlook for industry, record numbers of people remain in work, with earnings rising by more than inflation and very low mortgage and borrowing costs. The question remains as to whether the consumer can continue to bail out the economy or whether the fear of job losses becomes self-fulfilling as people rein in their spending.
In the past, "bad news" has been "good news" because it led to further monetary stimulus which boosted asset prices. The feeling now is that the real economy needs a boost and that this should come in the form of government spending. Optimism could return with a definitive outcome to Brexit, genuine progress in trade talks, or perhaps Germany leading the way with a fiscal stimulus package, but in the near term our focus will be on capital preservation.
The question remains as to whether the consumer can continue to bail out the economy or whether the fear of job losses becomes self-fulfilling.
Reducing risk across portfolios
In the current climate we feel that it is prudent to further reduce risk across the portfolios and are currently reducing exposure to some global funds whose bias towards US stock markets has resulted in strong performance.
Underweight fixed interest
We remain underweight fixed interest, preferring equities and alternative investments. Where we do hold fixed interest, we mostly use funds that have limited exposure to rising interest rates.
UK equities offer value
The UK does not look in a good place, but more bad news is already priced into its shares than in other developed economies. This will not protect the UK in the event of a global sell-off, but we believe it provides a more compelling case when the search for value returns.
Important information
This article is a marketing communication intended for general information only. It does not constitute personal advice, a recommendation, or an offer to buy or sell any investment. If you are unsure whether an investment is suitable for your circumstances, please seek personal advice.
Past performance is not a guide to future performance. The value of investments and any income from them can fall as well as rise. Capital values are at risk and not guaranteed. Forecasts and views expressed in this commentary represent our assessment at the time of writing and are subject to change.
To discuss how this commentary applies to your own portfolio, we would welcome a conversation.
Make an enquiry →