Market report week ending 15 March 2019 c/o Charles Stanley
A change in tone from the US central bank helped stock markets rally in
2019. This followed sharp falls at the end of last year when investors
became concerned that the Federal Reserve would raise interest rates at
too rapid a pace at a time when economic growth was slowing. However, Federal
Reserve Chairman Jerome Powell said at the start of January that the central bank
will be “patient” in its approach to monetary policy, providing a significant degree
Another big concern for investors has been Donald Trump’s trade war with China,
which is starting to have an impact on global trade flows and business sentiment.
Although the situation remains complex, hopes have been building that an
agreement can be reached soon after a series of high-level talks. President Trump
said the US and China are “very, very close” to signing a trade agreement,
potentially ending the long-running feud. The US administration’s decision to
delay tariff increases on $200bn worth of Chinese goods, which were due to take
effect on 1 March, also boosted hopes that the two sides were moving towards a
resolution. This optimism has driven a significant rebound in Chinese shares,
although there are still concerns about the level of bad debt in its economy and
whether growth targets can be met this year.
Even if there is some form of short-term resolution to the trade dispute, the
White House continues to believe that China’s efforts to get hold of US technology
are “an existential threat” to its future, so tensions are likely to continue. Indeed,
a US indictment against the Chinese telecoms giant Huawei has added to tension
between the two countries. The arrest of its chief financial officer Meng Wanzhou
is in relation to breaching sanctions against Iran, but the US is concerned that
Huawei technology can be used by Chinese authorities to spy on western
governments and citizens.
Trade concerns also hit Japanese shares, but they too have gained in 2019 after
the country’s economy returned to growth in the fourth quarter of 2018. Shares
in emerging markets have also rallied following a significant period of
underperformance, but remain volatile. They benefitted from domestic currency
strength, as the dollar rally came to a halt due to the Federal Reserve’s dovish
tone, and investment inflows into these fledgling nations have increased sharply.
The technology sector has been scrutinised after Apple warned that sales of its
iPhone were falling, particularly in China. This is, in part, due to a slowdown in the
Asian nation, but the trade war also appears to be a factor. Nevertheless, the
sector has recovered some of its losses, although the technology-heavy Nasdaq
remains below the all-time high seen in the summer of 2018.
With the UK facing a slowdown and challenges relating to its withdrawal from the
European Union, no increase in rates by the Bank of England is expected soon.
The future shape of the UK’s relationship with the European Union is still unclear
and talks could reach an impasse, as a number of sticking points remain,
particularly the nature of the Irish border after Brexit. It is possible that the exit
could be delayed from 29 March to allow talks to continue, but the lack of clarity
remains a major issue for markets.
There has been some positive news from Europe. The European Commission and
Italy reached an agreement over its 2019 budget and there will be no “excessive
deficit procedure” that could have led to a fine – and potentially fuelled euroscepticism
in Italy. This followed concessions made by French President
Emmanuel Macron with the Gilets Jaunes protesters that will increase the French
deficit to a level where it will breach Eurozone rules too. Despite the protests,
French GDP grew more than expected in the three months to December, although
it was a relatively anaemic 0.3%. Germany’s economy is also enduring a weak
patch. The possibility of some instability in Europe remains ahead of the European
Parliamentary elections and the appointment of a new European Commission
later this year.
Although economic growth is expected to slow in most regions, corporate
earnings are still expected to grow in mid-single digits. The FTSE 100
underperformed other major indices in 2019 due to the relative strength of the
pound; however, the more UK-focused mid-cap index performed better.