Weekly Market Update: China concerns see market volatility

Mon 17 Dec 2018

Read our full Market Update Week 50

Market Update

Last week the main driver for UK investor returns was the weakness in Sterling, which fell -1.1% vs USD and -0.5% vs EUR. The majority of the drop came on Friday as Theresa May’s inability to win concessions from the EU created further uncertainty about the future of Brexit. The result was that in Sterling terms, while global equity markets were mostly lower as ever changing news on US-China trade talks and the potential for a US government shutdown weighed on local equity returns, Global equities gained +0.2% with US equities up +0.1%. UK equities actually performed well, returning +1.0%, as Theresa May’s victory in a vote of confidence resulted in a rally on Tuesday and Wednesday, while the weaker Sterling also boosted performance. While the Euro rallied against GBP, it was relatively weak vs USD, so that European equities also benefited from a weakening currency, returning +1.1% in Sterling terms. Elsewhere Emerging Market and Japanese equites returned +0.3% and -1.0% respectively. It was mixed week for bonds as UK 10Y yields fell -2.5bps to 1.20%, while US 10Y yields rose +4.5bps to 2.89%. Oil had another poor week, down -2.7%, while Gold also fell -0.8% in USD terms.

CIO Analysis

Last week’s volatility was mostly due to fears that China is slowing down, something that has been evident for months, as global trade conditions have been deteriorating sharply. One of the differences between corporates and sovereigns is the impact of zero sum games. Much like the game of “Monopoly”, private business aims to eliminate the competition. Nations, however, cannot so easily ‘win’ at the expense of another, especially in the long term. While global trade volatility is entering its most crucial phase, the US President tweeted his satisfaction that the Chinese economy had taken a hit and predicted that China would soon relent and submit to American demands. However the lesson from two world wars was that, in victory – and make no mistake, Mr. Trump’s tactics have helped the US economy at the expense of the competition – it is vital to let the opponent save face. Should the Chinese feel compelled to retaliate to assert their status as the next superpower, not only will they not capitulate, but might find ways to up the ante. As long as investors see acrimony at the highest levels of policy making and no meaningful growth catalysts ahead, they will have a hard time justifying a belief in this bull market.

David Baker, CIO