Weekly Market Update: Global stocks rally on US & China “phase 1 deal”, Sterling declines as muted inflation increases rate cut probability

Mon 20 Jan 2020

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Market Update

Risk assets gained last week on the signing of the ‘phase 1’ trade deal between the US and China. Global stocks were up +1.9% in Sterling terms and +1.6% in local terms, reaching greater all-time highs. Returns for Sterling investors were pushed higher as the Pound fell on raised expectations of a BoE “Brexit eve” rate cut; this was driven by muted inflation and weak retail sales figures for the last quarter. US stocks saw the largest gain, up +2.3% with Housebuilders and Utility stocks leading the index higher, Energy stocks lagged the index and fell over the week. Japan posted the weakest equity performance of the major markets, where economic data out from the manufacturing sector continues to disappoint investors, with Japanese growth prospects still unfavourable. The change in monetary policy expectations saw gilt yields fall, with the UK 10Y yield closing the week at 0.632%. US 10Y yields were flat for the week, while German 10Y yields fell -1.6bps. Oil and gold were down -0.8% and -0.3% in US dollars terms respectively.

CIO Analysis

 Last week saw the signing of a “phase 1” economic deal between the US and China, good economic data out of the US housing market and Chinese GDP, as well a positive start to the earnings period, with 72% of S&P 500 companies reporting beating expectations. Additionally, the Bank of England has fuelled speculation over a rate cut in its January 30 meeting. These news items are certainly positive catalysts, but it is important for investors to remember that that the ongoing rally for risk assets is really underpinned by the very strong tailwind of consistent volatility repression by central banks. This is good in the sense that bad news, like another -not wholly improbable- twist in the US-China trade saga or possible worse numbers from US housing or consumption may be shaken off by investors. What may not be readily ignored by investors, however, is a further 1% decline in earnings (despite beating lowered expectations), which, coupled with strong equity momentum, could further push valuations higher, maybe even capping the equity rally. As for UK investors, a probable rate reduction is good news, especially for floating mortgages, but it is also a stark reminder that the economic growth remains fragile.   

David Baker, CIO