Market declines: US LIBOR or US trade war?.
Headlines scream trade war while a surge in US LIBOR is tightening US financial conditions
It is very easy to point the finger at US trade sanctions against China as a reason for the recent declines in equity markets. The prospect of a near-term confrontation, in respect of access to markets and IP protection (a free competition zone perhaps rather than a free trade area), is clearly unhelpful for global equity sentiment. China’s transition from a catch-up nation to an economic competitor always had to be resolved at some stage. However the second dynamic at work during Q1 18 is a rapid rise in US LIBOR, over and above that of official US interest rates. This is tightening monetary conditions rather faster than policymakers may have intended.
Read more...M&A in the UK - is Brexit opening a (relative) value opportunity?.
Whether down to the potential for Brexit or a widening current account deficit the decline in sterling over the last 6m has been substantial. On a quarter-on-quarter basis the trade-weighted value of sterling has fallen by 7%, representing a move of more than 2 standard deviations away from the mean.
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*Multiple Sectors
In this month’s strategy piece, Alastair believes that the impact of the easing of monetary policy during 2019 is still only likely to start to feed into the real economy by early 2020. The prospect of an improvement in economic conditions is now driving a substantial positive shift in investor expectations, leading to a reduction in risk premia and higher asset prices across asset classes. The US/China trade conflict appears to be moving towards a Phase 1 trade deal and at the time of writing the UK’s Conservative Party is sufficiently ahead in polling that in 2020 both a resolution to Brexit and a re-centring of British politics are now reasonable prospects, in our view. Nevertheless, based on the rally in global markets during the autumn, we believe a significant proportion of this political good news is in the price. Long term, the cohort of the largest global equities appears priced to offer returns in excess of currently very low yields on government bonds. We remain neutral on the outlook for equities, with the near-term risks of a relapse in confidence given the recent rally balanced against the more positive longer-term view. Finally, government bond yields appear at risk of further increases should the incoming economic data continue to improve.