Friday, 20th of December 2019
“Christmas: the only time of year you can sit in front of a dead tree eating candy out of socks.”
Stock markets continued to rally strongly this week as positive trade headlines brought Christmas cheer to investors around the world. As we write this newsletter – the last of 2019 – merry market sentiment has pushed the S&P 500 Index up +1.2% for the week and has carried fourth quarter performance to a striking +7.1%. This is before Friday trading opens, when further gains from US stocks are expected. Emerging markets have also fared well this week, with the MSCI EM Index up another +1.5% on the news that a phase-one US-China trade deal will be signed in January next year. (China is set to agree to a $200bn increase US goods imports, which is more than double the 2017 figure). European stocks were positive too, gaining ground amid the risk-on market environment. That said, they did have a mid-week wobble after the UK PM Boris Johnson announced that he would rule out in law any extension to the Brexit transition period beyond 31 December 2020. Some had naively believed that the PM would use his ‘stonking majority’ in the House of Commons to pivot towards membership of the EU Customs Union or some other form of ‘soft Brexit’ – and thus break all the promises he made to get his massive mandate. However, it is rare for smart politicians to commit suicide one week into a new government. An extension to the transition period is still possible, but the PM would be forced to bring new legislation to Parliament to nullify the bill that makes requesting one illegal at present, and he would not do this without very good reason. What is clear, then, is that the UK and EU are in for a nail-biting showdown over the terms of the future relationship at the end of next year. But it was ever thus.
In other news this week, the Donald became only the third US President in history to be impeached by the House of Representatives. It was a highly partisan vote, with not a single Republican supporting either Article (for Obstruction of Congress and Abuse of Power) and just two Democrats opposing both (one Democrat abstained, and another voted for one Article but not the other). The baton now passes to the Republican-controlled Senate, where a trial will begin in January next year and the GOP can steer the process. To convict the President and remove him from office, a two-thirds majority must vote in favour. This will not happen. Senate Majority Leader Mitch McConnell has made that clear. So why bother with the whole rigmarole in the first place? After all, whatever the merits of the case, 2020 is an election year and the voters will have their say on Trump’s record soon enough. At present, both sides are busy trying to spin impeachment to their advantage. For their part, the Democrats are presenting it as a solemn duty to protect the US Constitution from a corrupt opportunist who will do anything to stay in power – rather than as a way to maintain party discipline through primary season amid an influx of left-wing activists who want Trump out now by any means necessary. The Republicans, meanwhile, claim that the whole thing is just another hoax cooked up by the corrupt Washington Swamp to protect their failed policy agenda from a President who puts America First and who his opponents cannot beat fairly at the ballot box – rather than a reasonable response to what appears to be a dodgy deal with Ukraine to trade access to the White House for a politically-damaging investigation into rival Joe Biden’s son, Hunter. Our sense is that although polls suggest that 50% of Americans support impeachment, apathetic swing voters in small-town Pennsylvania do not. Moreover, when Senate Republicans take greater control of the process in early January, those polls may start to move in the President’s favour. Thus, we do not see impeachment as a watershed moment for markets and see little reason to change our portfolios in response. We already have a more defensive posture as 2019 comes to a close and we will maintain that stance into the early part of next year given the strength of the rally YTD.
There were also some key developments at central banks this week. Firstly, the UK Treasury confirmed that Andrew Bailey, the chief executive of the Financial Conduct Authority (FCA), will succeed Mark Carney as Bank of England Governor on 31 Jan. Initially seen as a shoe in, doubts were raised about his candidacy amid the collapse of funds managed by Neil Woodford and an investigation into the FCA’s role in regulating bankrupt investment firm London Capital & Finance. In the end, however, he emerged victorious over what were several high-profile alternatives and the appointment is unlikely to rock the boat. Some lament his lack of star quality, but after 10 years of central bankers strutting their stuff with mediocre results for the macroeconomy, someone a bit less full of themselves could be a breath of fresh air… Staying with the BOE, at its final meeting under Carney’s leadership the Monetary Policy Committee (MPC) decided to keep rates on hold at 75bps, despite subdued inflation expectations and softer economic data both at home and abroad (e.g., UK retail sales fell for the fourth straight month in November). This leaves the bank with room to cut rates next year if the economy underperforms and/or talks between the EU and UK turn nasty. It also supports sterling, which has been trading well below its fundamental value (at least on a PPP basis) since the 2016 EU referendum. We moved from bearish to neutral sterling before the UK election, given the high probability that Boris Johnson would secure a majority. However, we have no plans to overweight GBP in sterling accounts given the foreign exchange volatility and weakness that we expect to accompany next year’s Brexit talks.
Elsewhere in Europe, the Riksbank (which is Sweden’s central bank and the world’s oldest) called time on its experiment with negative rates. The hike from -0.25% to 0.00% was not unexpected, after having been well-telegraphed by the bank, but it comes at a time when European economic data is weakening, and inflation is muted. In his statement, the governor endorsed the view that negative interest rates were now doing more harm than good by boosting asset prices artificially, distorting bond markets and encouraging the unsustainable re-leveraging of weak balance sheets, increasing the risk of a financial crisis in the future. The ECB probably won’t follow suit, but the intellectual tide is turning on the monetary magicians sat atop the global economy…
From all of us at Bedrock – Happy Holidays!