25 January 2019
The global stock market recovery rally has entered its sixth consecutive week and there has been plenty of incredulity expressed across markets. How can this market rebound carry on beyond the initial recovery when the economic news flow is anything but inspiring? As already discussed last week, the answer has much to do with global monetary liquidity, which became very tight in Q4 and has since eased after central bankers either acknowledged that the global economic slowdown had robbed them of good reasons to raise rates or step up quantitative tightening. The European central bank (ECB) followed the US Federal Reserve’s lead and further soothed capital markets by hinting that they would refrain from raising rates for longer than previously indicated. Notably, ECB head Mario Draghi also gave additional support for speculations that the bank would restart its TLTRO program, which for all intents and purposes subsidises commercial banks’ refinancing costs if they step up their lending to the private sector. Such monetary stimulus may well be needed. The latest set of European economic indicators is signalling stagnation. It is quite possible that this latest bout of mixed economic broadcasts had something to do with a noticeable thawing of the EU’s Brexit position. Officials seem more sympathetic towards Theresa May’s predicament in finding the parliamentary majority for an orderly Brexit. Paradoxically the fact that UK stocks broke the global trend and declined over the week was driven by improving market sentiment, where investors are becoming increasingly confident that British and European politicians will not permit a no-deal Brexit scenario on 29 March. This pushed the value of £ Sterling against the US$ and the €-Euro to levels not seen for months which, as we know since the Brexit referendum, brings down valuations of the UK’s multinational companies. The value of their overseas earnings rises with falling £, but decline under a rising currency. It will be interesting to see market reactions to Tuesday’s second reading of the government’s Brexit deal proposal. In all likelihood the Prime Minister will lose once more. My money would be on little reaction, unless parliamentary majorities start moving in her direction (in light of any meaningful backstop concession by the EU) in which case £-Sterling and also the stock markets should rally on the reduction of uncertainty this may bring. On the other side of the Atlantic, US President Trump finally buckled under the public opinion pressure his self-inflicted government shutdown brought upon him. The three week reprieve this brought to government employees will be very welcome by those around them. However, markets hardly budged as they had anticipated as much already. For the coming week, the progression of the trade talks between China and the US will most probably be of higher long term importance to UK investors than what is probable to happen in the UK parliament’s next episode of the Brexit drama. For the shorter term, however, we will be more focused on further market action or rather reaction to the news flow. Should they continue to prove relatively immune and unphased by mediocre economic data flow, then we will see this as confirmation – against our previous expectations – that we have indeed witnessed a reversal of last year’s liquidity squeeze. Those who would like to understand the various market dynamics better are advised to have a look at Sam Leary’s article Market Technicals: where to next? which looks at the various constellations that are possible and likely from here for the next few weeks.