Weekly Market Update: Stock gains muted despite signs of a trade deal

Mon 02 Dec 2019

Global equities were positive last week, however energy stocks fell precipitously on plummeting oil prices, so that overall in local terms returns were +0.8%. Positive sentiment was boosted as the off-again, on-again negotiations between the US and China appear to be on-again, while a revised estimate of Q3 GDP showed the US economy expanded at a 2.1% annual pace, versus the previous estimate of 1.9%. A rally in Sterling (up +0.7% vs the US Dollar and +0.8% vs the Euro) meant that returns for UK investors were flat. UK equities gained +0.4%, while for overseas equities, in Sterling terms, US equites lead the way, up +0.2%. European equities were down -0.2%, Japanese equities -1.0% and Emerging Market equities -1.6%, although all except Emerging Market equities were up in local terms. It was a mixed week in the fixed income space, with UK 10Y Gilt yields down 0.8bp to 0.697%, however with US 10Y Treasury yields increasing 0.5bps to 1.776%. Gilts returned +0.7% over the week while UK corporate bonds added +0.4%. In the commodities space gold gained +0.2% while oil fell -4.4%.

CIO Analysis

At the end of the year we see some certainty returning to the markets. A US-China trade deal is closing in and central banks have resumed printing as stocks and bonds continue to hover near all time highs. Post election, the probability of a Conservative working majority is high, which at least means breaking the Brexit deadlock. So why aren’t we exuberant? Because there’s still no visible foundation upon which to build a sturdy bullish view. A trade truce between the world’s two largest economies remains a tweet (or a Hong Kong bill) away. In the UK the certainty of a transition deal will probably soon give way to the uncertainty of a trade treaty. More important, however, is the reason for central bank printing. In the US, what walks, talks and looks, but shall not be named, quantitative easing serves to bring short term borrowing costs down, after increased Treasury issuance predictably starved the market of cash. If this was planned helicopter money, then it would not be such a bad thing. But the increased deficit was used to pay for a short-term economic bump which has failed to increase consumer exuberance. In Europe QE is an admission that the economy is failing, only it does little to address its actual problems, namely fiscal constriction and over-reliance on exports of capital goods. So while the extra money has helped stocks break new highs, it is painfully obvious that it has not achieved much more. In fact, boosting stock prices in the face of lower earnings only makes valuations more expensive which threatens the rally. What does this mean for investors? a) That they must be patient for real signs of an economic and earnings pickup before they get on the bandwagon. b) There’s no free lunch. If higher stock prices simply result in more expensive shares then the rally may not go far. c) Investors must assess whether central bank actions can continue to support risk assets, which has been the single most important factor underpinning this cycle.