Weekly Market Review - 25 March 2019


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Global equity markets are up roughly one per cent this week. Volatility is still low and ten year US government bonds have rallied a little on the week and now stand at some 2.5% versus 2.6% last week. Year to date global equity markets are up some 12-13%.

The big news this week was the completion of the pivot on monetary policy by Fed Chairman Powell. On Wednesday he said that it may be some time before the US central bank needs to adjust its monetary policy. The comments came as he unveiled another startlingly dovish outlook that saw projections for future interest-rate increases slashed. Stock markets initially responded with a shrug but yesterday they raced ahead in the US.

A related topic, which is now also attracting attention, is the fact the difference between the US two year bond yield and the ten year bond yield has shrunk to almost zero and is now only 0.11%. In the past whenever the yield curve has inverted – so the difference has been negative – this has been a warning sign that the economy might be about to enter a recession. Several commentators believe this may not come to pass as they believe global industrial production is due for an upturn assuming trade and Brexit are resolved in a positive manner.

Turning to trade, President Trump said he will keep the tariffs he imposed on China in place until he is sure Beijing is complying with the terms of any trade deal. The comments, made on Wednesday, significantly dim hopes of an agreement soon, as Chinese negotiators had been pushing for the removal of the tariffs as part of a deal. Talks continue next week and analysts still think a deal is more likely than not as Trump would not want to risk weakening the American economy ahead of next year’s election. As was written last week, the risk to markets is now that a deal does not happen since there is still a chance that ultimately there is simply not enough political will to get a deal over the line.

The UK is in a similar situation, oddly, as there may not be enough political will to get anything done. Many had hoped that a no deal Brexit was off the table but events this week have changed this thinking. Late last night, the EU-27 agreed to grant the UK a short, two-tier extension to Article 50. So by postponing Brexit day by at least a fortnight, the UK and the EU have kept all options in play, for now. The UK can:

  • Choose by 12 April to leave the EU with “no deal”;
  • Leave the EU with the Prime Minister’s current Brexit deal on 22nd May;
  • Seek a long Brexit delay, involving participation in elections to the European Parliament; or
  • Unilaterally revoke Article 50.

Brexit probabilities have changed: it appears that no deal – the current default legal position – stands at a 20% likelihood, up from 10% last week. The chance that some version of May’s deal gets through at some point stands at 40%, so a little lower, and there appears to be a similar chance, so 40%, to other outcomes such as a second referendum or no Brexit at all.

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