The Lowdown on Markets to 4th November 2016
World Markets at a Glance
In this week’s issue
- Markets suffer a “Brexit moment” as woes mount over the US presidential election.
- Cash levels rise as investors take a more risk adverse stance ahead of important events.
- A UK High Court hearing rules that parliament should vote on when to trigger Article 50.
- The UK government will now approach the Supreme Court for this to be over ruled.
- The Bank of England governor Mark Carney announces that he will stay on until 2019.
- Risk assets are likely to remain volatile over the coming weeks as events unfold.
“Global equity markets retreat on fears over US presidential election result”
Last week saw the global equity markets suffer from a “Brexit moment” as investors became risk averse over the possibility that Donald Trump might score a victory in the US presidential election which will be held on Tuesday 08th November 2016. Clearly, this has been a very ugly, and at times, dirty election with Hillary Clinton and Donald Trump becoming very personal about each other’s lives to try and convert the electorate on Election Day.
Even in the last few weeks of the campaign we have seen story’s reported about Donald Trump’s alleged sexual misconduct over recent years, and then recently, it has been reported that the FBI was reopening its investigation over the story that Hillary Clinton had used a private email server whilst she was secretary of state. Clearly, these recent stories on each of the candidates has led to a much closer race for the White House, and perhaps more importantly, led to more volatile times in the financial markets.
On the face of it, as we enter the last few days in the campaign, the polls are showing a narrow win for Hillary Clinton making her the first lady president of the United States of America. However, the polls can be deceiving, remember what happened in the UK’s European referendum vote, when the UK electorate chose to leave the European Union when it was thought that the “remain vote” would win by a narrow margin.
“The polls are showing a narrow win for Hillary Clinton”
Whatever the outcome of the US presidential election the markets are likely to trade nervously over the coming days and weeks, clearly, we have already seen Wall Street, and the wider global investor, respond anxiously over the past few days with the S&P 500 Index recording its ninth straight losing session in a row, its worst run in 36 years. However, whilst nerves seem to be high, it might be that the UK referendum vote has given us a road map of what to expect over the coming few weeks.
Simply put, the UK market suffered from a big post-Brexit sell off, and a collapse in sterling, which then was subsequently followed by an aggressive rebound in stocks, particularly those that were beneficiaries from the weaker pound. Admittedly, sterling continues to suffer which is logical given the uncertainties surrounding the invoking of Article 50.
But of course, it will then be the longer-term issues that the markets will begin to focus upon, given that there will be conflicting winners and losers within the US stock market dependant on which candidate wins the election. Obviously, whilst both candidates have differing polices, as president, they will still need to confront the United States Congress, and whilst Mrs Clinton appears to be a known quantity, whilst Mr Trump is not, investment managers have already made some tactical calls, pre-election, to try and safe guard their portfolios from any unforeseen political events, or adjustments in the markets once the outcome is known.
Rising anxieties amongst global investors has led to cash levels rising in recent days whilst inflows into gold bullion and Government bonds have been chosen as the asset class of choice as a period of de-risking portfolios has taken place. Also the announcement from the Federal Reserve Bank that US interest rates would remain on hold pre-election has been a boost for the US bond market, as investors take refuge.
“The announcement from the Federal Reserve Bank that US interest rates would remain on hold pre-election has been a boost for the US bond market”
Another market indicator that has seen a noticeable rise in recent times has been the Vix Index which is viewed by many as a key measure of market expectation of near term volatility. Indeed, since the end of October we have seen this index rise by over 70 per cent which gives you some idea of how investors have become more nervous of current events as they unfold.
Similarly, another trial and tribulation that has affected market sentiment in recent times has been the ongoing question regarding the UK governments invoking of Article 50, which would begin the proceedings for the UK to exit from the European Union. However, on Thursday of last week a High Court hearing ruled that Parliament should vote on when the government can trigger Article 50 which immediately led to some turmoil in the market place leaving the FTSE 100 Index down by over 4 per cent over the week, whilst sterling gained ground over a basket of leading currencies.
In fact, since the FTSE 100 Index rallied above the 7,000 level back in October, we have seen the market drift back by just under 6 per cent which might be suggesting that investors are beginning to suffer some fatigue after the rally post Brexit. Furthermore, the National Institute of Economic and Social Research has predicted a 60 per cent drop in exports once the UK has left the European single market which has acted as an immediate headwind to market sentiment.
None-the-less, UK prime minister, Theresa May, has vowed to carry out “Brexit” in the full despite the High Court ruling on leaving the EU stating that the government needs to get on with the job and that MP’s should accept the UK electorates decision and the overall referendum result.
“There are some very important European presidential and parliamentary elections being held in 2017”
Understandably, this situation is likely to keep investors fairly nervous over the coming weeks given that the government will now go to the supreme court next month in an attempt to upturn the High Court ruling which Mrs May has said that she is confident will happen, allowing the government to then proceed with the invoking of Article 50 by March 2017. Also it is worth recalling that there are some very important European presidential and parliamentary elections being held in 2017, chiefly, those in France, Germany and the Netherlands which might throw up some surprising results given the uncertain political landscape that we find ourselves both in the developed and the developing world.
Another important UK announcement was made last week, which will now end the speculation as to the future of the governor of the Bank of England. Mark Carney announced that he will extend his period as governor until June 2019, but declined the opportunity to serve out his full eight year term which would have taken him to 2021. However by staying on as governor until 2019 does mean that Mr Carney will be at the helm of the central bank until Britain leaves the EU. Undoubtedly, this will be seen as an encouraging stance from both the government and the central bank to press on with Britain’s European departure.
Admittedly, the governor has been forced to admit that he was far too gloomy about the outlook for the UK economy following the European referendum vote, and his many critics have not been slow in making that point. With inflation now beginning rise and the UK economy producing better than expected GDP numbers, his hasty interest rate cut and additional quantitative easing programme is under scrutiny. Obviously, the depreciation in sterling is now creating inflationary pressures, which in turn, has seen costs rise in such things as cloths, petrol, and hotel accommodation. This is likely to harm the consumer overtime as real disposable incomes become less and therefore begin to hold back GDP growth and living standards.
And so, in respect to inflation forecasts, the Bank of England’s Monetary Policy Committee have said that they expect inflation to exceed its 2 per cent target by next spring, peak at 2.8 per cent in 2018, stay above 2.5 per cent well into 2019 before returning to the bank’s target by 2020. However, the National Institute of Economic and Social Research are saying that inflation could rise to 4 per cent by late 2017, before falling back to the Bank of England’s target of 2 per cent by 2020.
“Inflation could rise to 4 per cent by late 2017, before falling back to the Bank of England’s target of 2 per cent by 2020”
And so moving on to other market data, the latest US jobs numbers has revealed that there was a further 161,000 jobs created in October whilst the unemployment rate stands at 4.9 per cent its lowest level for some time. Also wage growth has picked up sharply over the course of the year which would indicate that inflationary pressures will begin to rise in due course, therefore, their seems very little reason why the Federal Reserve Bank would not raise rates in December once they know the outcome of the election.
And so as the markets stand, we are likely to have a few more days of uncertainty with a further sell off on a Trump victory, or a relief rally in the event of a Clinton win. But of course, over the longer term which ever presidential candidate enters the White House will bring some anxieties given their political and personal track records. And from an investment perspective, it is likely to be a game of wait and see with only infrastructure spending appearing to be something that both candidates will pursue if successful, and of course, treasury inflation protection securities, but that might apply to other economies and markets if inflationary dynamics were to return in force. As for global equity markets? Whilst nervous bulls will watch events very carefully over the coming weeks the seasonal Santa Claus rally should edge ever closer giving them some respite before we enter what can only be described as a very interesting 2017.
Peter Lowman Chief Investment Officer
Peter Lowman has been in investment management for over forty years and prior to becoming Chief Investment Officer for Investment Quorum, he worked within a larger asset managers, primarily as an Investment Director with Cazenove’s. He is responsible for the overall investment strategy for Investment Quorum clients and sits on the Investment Quorum Committee.
This article does not constitute specific advice and investors should bear in mind capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority .